Contracts For Differences, or CFDs, are a low cost alternative to traditional dealing. With the same initial investment, CFDs enable you to do more with your money than regular dealing, and your profits could be much greater, as would your losses should your trade go against you.
A CFD is an agreement to exchange the difference between the opening and closing price of an asset at a point when the CFD is closed. In traditional share dealing, for every point the profits of an asset you own moves up, your profit increases. For every point it moves down, you make a loss.
A CFD trade however, allows you to choose to go long or short, giving you the potential to profit from rising or falling markets. By not owning the underlying share itself, you currently do not need to pay stamp duty.
Let’s take a closer look at some of the features. All CFD trades are leveraged. This means that you only need to deposit a small fraction of an assets total value to place a CFD. For example, if you wanted to trade £10,000 worth of Vodafone shares, you would only need to initially deposit as little as £500.
It is important to understand the effect leverage has on your trading. Your trading can result in losses that exceed your initial deposit. You can place a position regardless of whether you think the market will move up or down. This is called going long or short. Going long by speculating that the market price will go up and your profits will rise in line with that increase. Similarly, your losses will increase as the price falls. Or go short, expecting that the price will fall in value, and your profits will rise as the price falls, while your losses will increase as the price rises instead. CFDs can be used as insurance to protect against other potential losses by using them to hedge. If you foresee a short term risk in your long term investments, the profit you make from a short CFD