CFD (or Contract For Difference) 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. Firms like IGmarkets charge a commission rate for UK and other major shares is just 0.1%.
When you open a position, however, you do not have to pay for the full value of the shares. Instead you put up a deposit, from just 5% when using a Trader Account. This means you can trade up to 20 times your initial capital.
When you close your position, the difference between your opening contract value and your closing contract value is realised. 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.
One key benefit of trading CFDs is that you do not incur any stamp duty, as you are not making a physical purchase.
Geared 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 geared products than for non-geared products.
Go long or short
With CFDs you can buy or sell at the quoted price, to profit from rising or falling markets. Other methods of shorting shares are often inconvenient and expensive.
CFDs can be used to trade an extremely wide range of financial products and this means they offer a way to easily start dealing across a large cross-section of the market.
For example, if you have an interest in shares, the level of Wall Street, the price of oil and the exchange rate of the dollar against the euro, you can deal all of these markets with one CFD provider on one account.
For a free demo CFC account please visit IGMarkets