A Contract for Difference, or 'CFD', is a contract between you and your CFD provider (Such as Spectrum Live) to settle the difference in cash between the price at which you buy the CFD and the price at which you sell.
The price of a share CFD mirrors the underlying share price. For example, if the price of IBM is quoted on the exchange at $85.16 (Bid) - $85.17 (Ask) then the CFD on IBM will have the same quote. If the price of IBM moves up in the underlying market then so does the CFD. For most markets there is no difference between the CFD prices and the underlying share prices in the physical market.
Therefore, instead of buying or selling physical shares, the CFD holder gets access to the performance - or price movements of a share - without ever having to take delivery of the actual shares. That is, CFDs allow you to receive most of the benefits of owning a security (share) without having to actually own the security (share). In other words you do not take delivery of the security so any difference in the price between when you buy the CFD and when you sell it is settled in cash. The difference is either profit or loss.
Trade on Margin
CFDs are traded on margin, from 10% for shares and 5% for indices. This is a more efficient use of your capital because you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining full exposure to the market. This enables you to magnify the returns on your investment. However, the risks are also magnified so its important to know what you're doing when it comes to trading CFDs.
For more information on CFDs online, check out www.moneysmart.gov.au
To find out more about Trading Pursuits' strategies to trade CFDs with risk management, attend one of our free 2 hour stock market education seminars.