Trading in CFDs , or “Contracts for Difference”, is a potentially lucrative yet risky form of investment. CFDs are a derivatives product allowing you to trade on market movements without owning the shares on which the movement is based.
Traders make money by speculating on the future movement of a market – whether that is up or down. CFDs are very tax-efficient – you don’t pay Stamp Duty, as you would when buying shares, as no taxable assets change hands.
CFDs are leveraged products which allow you to get the full benefit of the market movement while only putting a small proportion of the share price up front. This means a high potential for return on investment but also higher risk. You also need to pay attention to the overnight financing charge, one significant difference between CFD trading and share trading, which can really eat into your profits.
CFD trading gives you the option to go long (buy) if you think the market is rising, or go short (sell) in one that is on the decline. If you believe that a share price is likely to fall in the short-term, you can sell and your profits will rise with any fall in the price. However, if you have got it wrong and the market moves in another direction, your losses will increase.