Australia's securities watchdog released on Friday a new guidance that demands more disclosure on some investment instruments that lures a lot of investors because of the promise of high returns.

The Australian Securities and Investment Commission (ASIC) said most CFDs in Australia are issued as over-the-counter (OTC) products, making them increasingly accessible and popular with retail investors. But CFDs are a high-risk financial product and their complexity means they are unlikely to meet the investment needs of many retail investors.

The main advantage of a CFD is that it offers investors a stake in a larger number of shares and therefore the profit is far higher than if they just bought the actual shares. However, this is also a cause of concern for the ASIC because many investors do not realise that behind the promise of infinite returns lurks the danger of infinite losses.

ASIC released new disclosure benchmarks for CFDs on Friday which call for financial institutions to follow strict guidelines to ensure potential investors understand the risks and benefits of improved investor awareness

According to ASIC Chairman Greg Medcraft, action was needed to ensure people considering CFDs are aware of the downside as well as the upside.

‘CFDs are extremely risky financial products. Most investors don't understand that complexity and they don't get independent financial advice. That means we need CFD issuers to do a much better job of spelling out to investors the risks as well as the rewards of these complex products,’ Mr Medcraft said.

‘ASIC’s number one priority is ensuring investors and financial consumers are confident and informed. We want issuers to work harder to ensure people investing in CFDs better understand what they are getting into – before they start trading.’

CFDs are leveraged derivative products that let investors take a position on the change in the market price of an underlying asset, such as a share or commodity, or the value of an index or a currency exchange rate. There are currently around 39,000 active CFD investors in Australia.