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CFD trading gives you the power to trade against share price movements without actually buying or selling the physical shares, this means that they are quick and accessible, removing the need to trade through a stock broker.
Because you are trading on margin, CFDs can enhance the risk/return on your investment capital. This means that, when you trade CFDs, you don't have to put up the full value of the shares you are trading. Instead you pay a deposit or 'margin' to cover most of the potential loss on the position. This is typically a fraction of the full contract value.
Put another way, trading on margin magnifies your profits however it also magnifies your losses and you can lose more than your initial deposit.
Shares CFDs
A CFD contract replicates as closely as possible the equivalent share transaction. Unlike financial spread betting, you are not betting per point movement of the share price. Rather, you buy or sell a quantity of CFDs, equivalent to a number of shares (although no physical share transaction actually takes place).
Rather than paying a commission for trading equity CFDs, CFD companies like InterTrader apply a small spread to the underlying market spread.
With traditional share trading, going short of a share can be quite complicated. However with CFDs you simply open your CFD contract to go short rather than long. This gives you the ability quickly to set up hedging transactions as required.
Why Trade CFDs?
CFDs are not used solely for speculating on shares. Most CFD companies also offer stock indices, forex, and commodities.
When you trade CFDs on non-equity markets you buy or sell a certain number of contracts, where each contract represents a given risk/return on the underlying market.
For example, one contract of the InterTrader FTSE 100 market represents a risk/return of £1 per point movement in the underlying market. So if you sell 4 contracts of the FTSE 100 you will make £4 for every point the FTSE 100 falls and lose £4 for every point the FTSE 100 rises.
Rolling Daily vs Futures Contracts
With a 'Rolling Daily' CFD the investor can decide how long the contract will stay open.
Unlike a futures contract, there is no fixed expiry date with a Rolling Daily, This can give an investor a certain amount of freedom. Be aware though that if you keep a Rolling Daily trade open overnight you will often be charged a small financing fee.
InterTrader Account / InterTrader Website
Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
Why Trade CFDs?, last edited by F. Lawson, 22-Dec-11.
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Warning: Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
The contents of this website are for information purposes only and not intended as a recommendation to trade nor does the content constitute investment advice. All reasonable efforts have been made to present accurate information. Neither CFDs-Online.com nor any contributing company or individual accepts any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
* Tax law is subject to change. It can also differ if you pay tax in a jurisdiction other than the UK.
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