Types of ASX brokes.
When you open a broker account in Australia, you’ll usually ome across two very different ways of holding shares. CFD trading and CHESS-Sponsored holdings. Both let you buy and sell, but they work in very different ways.
A CHESS-sponsored broker connects directly to the ASX settlement systems. CHESS stands for Clearing House Electronic Subregister System. If you use one of these brokers, the shares you buy are recorded in your own name with a unique Holder Identification Number (HIN). That means you are the legal owner of the shares, you can hold them as long as you like. The main benefit is security and transparency. The main downside is you usually pay a higher brokerage fee for each trade and have a higher minimum order requirements.
CFD brokers, on the other hand, don’t give you direct ownership of the shares. CFD stands for Contract for Difference. Instead of owning the stock, you are entering a contract with the broker to take a position on whether the price will go up or down. This makes it possible to trade with leverage, meaning you can put a small amount of money in and control a much larger position. The upside is flexibility and the chance to make bigger gains with less capital. The downside is risk. Leverage magnifies losses jsut as much as gains and because you don’t own the shares, if the broker goes bust you lose your holdings.
In shrot, CHESS-Sponsored brokers are for investors who want to own shares securely in their name, while CFD brokers are for traders willing to take on high risk for quick gains. It should be known that it is recommended by most professionals to use a CHESS broker as it is safer and more straightforward. Many CFD brokers only make money when you lose and as such are best avoided by beginners.