Contracts for Difference offer the investing public the opportunity to trade financial markets using leverage. This means you only need to commit a portion of the total trade (usually between 1% and 10% but sometimes higher). This is called your margin. The rest of the value of the trade is loaned to you by your CFD broker. While you are only trading with a fraction of the money you might ordinarily require, you get to keep all the profit – or the loss – you make on the trade.
CFDs represent one of the most cost-effective ways to trade currencies and commodities. The price of the CFD you are offered is based on an underlying derivative contract or other security (like a share, bond or financial index), but by purchasing a CFD you are not purchasing that underlying security. You are simply buying a contract with your CFD market maker. This means you don’t need to worry about any of the costs associated with shares and other financial market assets. In addition, commissions charged for trading CFDs will often by much lower than those levied for trading physical assets, like shares.
Be warned: there are risks associated with Contracts for Difference
Because you are trading on margin, it is possible to lose more money than your initial margin deposit if the market moves against you. Investors are encouraged to use a stop loss to protect them against heavy losses. A stop loss is a sell order which will close your position automatically once it passes a certain point.
If you do not live in the UK or Republic of Ireland – where you can benefit from tax free spread betting accounts – CFDs are arguably the best option for trading multiple financial markets from a single account. You can check out a selection of the best CFD trading platforms here. Unfortunately, CFDs are currently not available for sale in the United States, although they are in the process of being authorised in some Canadian provinces.