England – 07/11/2011 – Trading in CFDs has always been popular amongst the professional community now private investors are using them too
Until fairly recently most people had no idea what CFDs were. However, now that people do understand them they are seeing them as fantastic investment vehicles and are embracing them enthusiastically.
A CFD or Contract For Difference allows investors to invest a small amount of money and bet on whether the price of a stock, share, commodity, currency or derivative will go up or down. If they bet correctly they make money if they bet incorrectly they lose money. The cost of each transaction is low and the level of commission paid on each transaction is also very low indeed.
How CFDs work
A simple example can explain the basics of CFDs. Let’s say you wanted to buy 100 shares in ACME Ltd and that the share price is currently £1 per share. Were you to make this trade the traditional way you would have to find £100 to buy the shares plus pay commission to buy and sell those shares. With CFDs you only need to have a stake in each share. That stake is typically 5-10% of the value of the share, so all you need, to trade 100 ACME shares, is £5-£10 to buy your 5-10% stake.
If you bet on those ACME shares to rise in value and they do you get the difference in the value they have risen by. So if the shares rise to £1.20 you get 100 x 20p (more or less), so on a £5-£10 investment you have made £20 minus commission of around 0.1 – 0.6%. However, if you bet wrong and the shares fall to 80p you have to pay out £20. As a consequence, CFDs are not for everyone in small amounts you can cover those losses, but larger trades can soon get out of control and mount into big losses.
Sunbird FX has been helping its clients to trade CFDs for several years now and they have seen them grow in popularity over the past few years. This is in part because people have less to invest.Plus more people are trading rather than leaving their money in the bank getting eaten away by compensation.
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