What are CFDs?
CFDs are a way of trading on the price movements of financial markets around the world without buying or selling the underlying asset directly. They provide the opportunity to make profits (or losses) from a wide range of markets including equities, indices, currencies and commodities.
CFDs can be used to speculate on upward or downward price movements, making them a flexible alternative to traditional trading.
How do CFDs work?
A CFD (Contract for Difference) is basically an agreement to exchange the difference between the opening and closing value of a contract at its close. The price of your CFD will then replicate the price of the underlying asset giving you a profit (or a loss) as the price of the underlying moves.
CFD prices
As with traditional share dealing, CFD prices are quoted as a Bid (the price you can sell at) and an Offer (the price you can buy at). You then buy or sell a CFD based on the value of a certain amount of the underlying asset.
Margin trading
Margin trading enables you to trade an entire portfolio without tying up large amounts of capital. When you lodge a security deposit of, say just £20,000 (or equivalent currency) in your account, you can typically trade up to £200,000 worth of shares. This is a leverage factor of 10:1 or, to put it another way, a margin requirement of 10%.
Although the normal margin requirement is 10% for CFDs in FTSE 350 shares, some of the leading shares may require only 5% margin. This represents a leverage factor of 20:1. For smaller companies or if a share price is notably volatile, the margin requirement may be set above 10%.
Trading CFDs on margin allows you to take large market positions in relation to the money you have deposited. Margin trading magnifies both your profits and your losses.
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