CFD trading enables speculation on market movements without owning the underlying asset. Contracts are bought and sold, instead of physical shares, with an agreement between the buyer and seller to swap the difference in value at the closing of the contract.
A key difference between a CFD and traditional forms of trading is that it is a leveraged product. This means that only a percentage of the total exposure to a trade needs to be deposited in your account – this is known as a ‘margin’.
For example, the Core Spreads margin requirement to place a trade on Wall Street – Rolling Cash is 5% e.g. if the total nominal value of the trade is $25,438 at a given time, only $1,271.90 needs to be deposited with Core Spreads to open the CFD trade ($25,438 x 5%).
This gearing means that CFDs offer the potential for significantly larger profits than standard forms of trading. However, it is important to recognise that these potential profits come with an increased risk of incurring losses.