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What is a CFD?
A CFD (Contract for Difference) is simply an agreement to exchange the difference in value of a particular share, indices, commodity, precious metals, and treasuries and so on between the time at which a contract is opened and the time at which it is closed. CFDs are a unique leverage trading product.
Another way to the financial markets
CFD trading essentially allows you to trade on a huge range of markets, without physically purchasing the underlying instrument, and make a potential profit if the market goes down, as well as up. For example, you could trade on the price of Crude Oil without actually purchasing barrels of oil, or on the price of a stock without buying or selling the share.
Share 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. For example, the commission rate for UK and other major shares is just 0.1% (see Costs & Margins).
Trade on margin
With CFD trading you do not have to pay for the full value of the position you have chosen. Instead you put up a deposit, or margin, from just 5% when using a Trader Account. This means you can trade up to 20 times your initial capital.
Follow your judgement
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 and other markets are often inconvenient and expensive.
Wide access
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.
Less capital, more potential
Using the shares market as an example, a key difference between CFD trading and share trading is that when you open a CFD position, you do not have to pay for the full value of the shares. Instead you put up a deposit, which starts from just 5% for major UK shares. This means you can trade up to 20 times your initial capital – greatly increasing the potential of your investment. You deal at the cash price of the market you select, and pay your broker a commission which is calculated as a percentage of the value of the transaction.
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.
Geared products like CFDs can help you make the most effective use of your investment capital. However, CFDs are a leveraged product and can result in losses that exceed your initial deposit. Trading CFDs may not be suitable for everyone, so please ensure that you fully understand the risks involved.
 Benefits of CFDs |
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