Trading Shares With Contracts For Difference

A CFD is an agreement between two parties to exchange the price difference of a financial instrument. The profit & loss is determined by the difference in the entry and exit price of the underlying instrument from when the contract is opened and closed. It allow the buyer or seller to gain market exposure while only outlaying part of the full notional value of the instrument.

I believe that trading a CFD is very similar to trading actual shares, except that you are trading with a margin, meaning that you only have to put up a certain percentage of your purchase.

When holding a CFD overnight, you are paying interest. The interest charged is generally calculated on a daily basis, usually about 3% higher than the cash rate set by the reserve bank, Check with your broker.

In this respect, there is very little difference between long term investment in a CFD or investing in shares. Don't forget, if you are purchasing equity by drawing money out of your capital trading account, you forgo interest received.

A CFD of course presents some degree of danger which we will explore a bit later. If you wish to trade a CFD, you have to make up your mind whether you wish to be a day trader or wish to hold the position for any length of time. If you wish to hold your position for anything else but to day trade, never ever take a bigger CFD position than what you would take with the actual stock. In this case, only use it to work with borrowed money. Always protect your trading capital. In other words,money management is of the essence. If you adhere to money management principles, trading a CFD is as safe as trading shares.

Remember: Leverage multiplies your investing power when you are right, but it also multiplies your losses when you are wrong.

You need to have a stop loss strategy to preserve your trading capital!