Trading a CFD, is no different in principle, to the way you may trade a normal share however, the product although extremely flexible represents a significantly higher risk/reward ratio investment to the investor.
The critical difference is that instead of paying the full value of a share and becoming the owner, you are instead only paying a deposit of 10% of the share’s value and at no stage do you take ownership.
Although CFD’s do not attract stamp duty they are subject to CGT and income tax.
However, unlike spread bets CFDs trade at the prevailing market price (no added spread) and they do not have an expiry point (although you do pay a daily interest on long positions).
You receive the full benefit of any profits, dividends or uplift achieved on the full amount you are controlling but are equally responsible for any loss.
One of the key attractions of trading with CFD’s is that they can be used with great effect to take advantage of a developing pattern in the market.
Counter to the traditional way of making a profit with shares, a CFD can be used to make a profit by anticipating a fall in value as much as a rise in value.
Because you are only required to deposit what is sometimes only a tenth of the amount you wish to control there is a fundamentally greater risk in using a CFD over a traditional share.
A CFD is essentially an agreement between two parties to exchange the difference between the opening and the closing price of a stated transaction multiplied by the number of shares specified in the contract.