What is a CFD?

A CFD (Contract For Difference) is a derivative product that allows you to trade on the fluctuations of the stock price without owning the actual stock. The CFD price behaves exactly like the underlying stock price, but trading CFDs allows a number of advantages not available in stock trading. For instance, you can short sell CFDs, thereby taking advantage of the downturns in the stock market.

When you open a position, you do not have to pay for the full value of the shares. Instead you put up a deposit, starting as low as just 2%. This means you can trade up to 50 times your initial capital.

When you close your position, the difference between your opening contract value and your closing contract value is realized. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose.

Why should you trade CFDs?

CFDs can be relatively simple and inexpensive to trade, and are more flexible than other trading alternatives. This has led to their growing popularity in Europe and Australia.

If you are a trader, CFDs can make an excellent complement to the methods you already use due to the fact that you can buy or sell a wide range of markets in different market conditions. Because CFDs are based on underlying financial market fluctuations, they also suit most trading strategies, as they follow the same patterns and trends as the markets from which they are derived.

A CFD is simply an agreement to exchange the difference in value of a particular share between the time at which the contract is opened and the time at which it is closed.

CFD trading is very similar to normal share dealing in two respects. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction.

Leveraged products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for leveraged products than for non-leveraged products.