Why Trade Contracts for Difference?

CFD trading allows you to take a position in the financial markets at a fraction of the usual cost because you are not actually purchasing the underlying instrument. A CFD stands for contracts for difference.

With CFD trading, because you don’t have to pay the full value of any position you take up – just a small deposit (margin) – you can leverage up to 20 times your initial capital outlay. This is called trading on margin. CFD trading is flexible enough to allow you to not only profit from rising markets (going long) but falling markets (going short) too.

How does CFD Trading work?

A contract for difference is an agreement to exchange the difference in value of a financial instrument between the time at which it is opened and the time at which it is closed. When you trade CFDs you ‘sell’ if you think the market will fall and ‘buy’ if you think it will fall. The amount of money you make, or lose, is determined by the amount of contracts you hold multiplied by the difference in price at which you opened and the price at which you closed.

Remember the initial deposit, or margin, you have to pay is relatively small; you will also have to pay a nominal rate of commission, typically around 0.10%. Unlike traditional share dealing you won’t pay any broker’s fees or stamp duty when trading CFDs.

Managing your risk

CFD providers offer various ways you can manage your risk exposure.Use trailing stops to lock-in profit every time you trade, or pay a small controlled risk premium to guarantee an absolute limit on any potential losses.

Sophisticated online dealing platforms

Most CFD trades are placed online directly through the provider via a trading platform. Make sure you take time to find the trading platform that best suits your needs. IG Markets’ PureDeal platform is considered by many as the market leader. It works from your browser and allows for intuitive and precise trading, while also providing access to professional-level charts and a free news-feed from Reuters.

If you are an experienced CFD trader, it will be interesting to note that some CFD providers offer Direct Market Access, allowing you to send orders directly to a stock exchange.

More information…

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.