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There's an infinite array of investment possibilities to suit every type of investor and risk appetite. You could take a long-term approach in which case you may buy and hold shares and mature blue chip companies. But what if you have a more aggressive approach, what if you want to maximize the impact of the cash you have available?

What have you want the flexibility to take and liquidate a position at short notice to take advantage of alternative opportunities and transfer your resources elsewhere? What if you are indifferent to actually owning the investment asset itself, but simply want to profit from its performance. If these are your trading priorities, then you might consider contracts for difference, better known as CFDs.

Contracts for difference, allow you to invest in the performance of a vast arrange of securities and asset classes, such as shares, equity, indices, like the S and P 500 and commodities such as gold, but without having to actually purchase or own the underlying asset. Instead, you enter into an arrangement with your broker to put up a relatively small sum, often around 10%.

This is known as margin it's designed to cover any day-to-day losses that arise while your broker effectively funds the remainder of your investment. We'll look at margin and leverage through a few examples, but let's take a moment to look at the differences between CFDs and stocks. A stock is a share of ownership in.

By purchasing a stock, you become a shareholder in that company. You may benefit from dividends can vote on key corporate decisions and possess certain rights to buy 100 stocks in company ABC. At $10, you need a thousand dollars purchase equals ownership. The price of a stock goes up and down depending on many factors.

You purchase the stock at a quoted price and the rise or decline in the stocks, value results in either a profit or a loss it's considered a traditional way to trade financial markets and trading stocks means you have to purchase them before you can sell meaning that you can profit from a rising price.

Only after you've bought the stock. If the stock drops below your purchase price, you lose. If you believe that the general market trend is downwards, CFDs are going to be beneficial to your strategy. So what about a CFD? A CFD or contract for difference is a contract between you, the investor and a CFD provider.

It's an agreement to settle in cash. The difference between an opening price and a closing price of a particular asset that you have taken a position. The CFD then tracks that asset price. That's the direct relationship between them. You take the position based on whether you think the asset will go up or down in value.

So for example, you can place a CFD trade on a stock and the value of the CFD position will rise or fall with that stock price. The stock is therefore known as the underlying. And as you were purchasing a CFD from a provider, then you don't own that underlying stock, not owning the stock leads to some key differences.

For example, CFDs are traded on margin. You only have to put up collateral. This means you can leverage your cap. The amount of margin required, varies and is defined by your provider. But if it's 10% typical for large companies like apple, then that is the equivalent to 10 times leverage buying the ABC stocks.

In the example, at the start of this CFD explainer was a thousand dollars. If you bought them with a CFD at 5% margin, you would require $50 in your account. Your profit or loss would move with the ABC stock price in the same way as if you owned it. Therefore the low CFD margin requirement means any profit percentage is higher, but any downward movement is also magnified.

But CFD trading means that you can sell stocks that you don't own. Remember, it's still a contract between you and the CFD provider. Not only. Therefore CFDs allow you to benefit from a falling market. You can sell a CFD on a stock that you believe will fall in price and then aim to buy it back later for less money and make a profit.

But remember, if it rises in value, you'll potentially lose money and stock trading is one asset type or class a CFD on the other hand is an industry. Uh, derivative, therefore CFDs can be used to deal on stocks, foreign exchange, commodities, and so on. And therefore more international markets open up to you as an investor, allowing for portfolio diversification, all from one CFD account.

You want to invest in company ABC it's trading at $10. You believe that the stock is going to rise and therefore you want to invest. You want to purchase a thousand shares with a traditional stock purchase. This would cost you $10,000, 10 times 1000 plus any associated costs. So you buy the stock and it goes up to $11 per share.

You decide to sell the stock and therefore get $11,000. This would net you a $1,000 profit ignoring trading costs for the sake of this illustration, your $1,000 profit on an initial outlay of 10,000 means a 10% profit. If you've done the same trade virus, CFD, it would have had different consequences.

Let's say that you will CFD provider quotes a margin of 10% on the ABC. Therefore to buy $10,000 of shares, you'd need a thousand dollars in your margin account. As the shares went up to $11, you close the CFD position and just like the stock trade, you make a $1,000 profit, but there's a key difference.

You invested a thousand dollars and made a thousand. Therefore instead of a 10% return on investment, the CFD would give you a 100% profit. Clearly trading on CFDs has advantages, but be where margin trading has two sides to it. Whilst your potential profits can be magnified due to the fact that you haven't paid the full stock price for your CFD position.

Conversely losses are also potentially. Margin also subjects the investor to a number of unique risks, such as interest payments for use of the borrowed money. It's essential that as an investor, you understand the advantages and the disadvantages of any financial instrument. Before you start trading apple shares are trading at 99 to a hundred dollars.

You buy 500 apple CFDs at a hundred dollars. Each that's $50,000 of notional investment. Putting in cash of 10% of $50,000 into your margin account. Your equity is $5,000. That's 10% times $50,000. Your broker then finances, the other 90% for you in the market. Later in the day, apple has risen to $103. So you sell your 500 apple CFDs for $103.

Each. If the trade was left open beyond the first day, you'd have to consider an interest payment too. But for now, let's keep this example, simple bike ignoring the impact of interest and commissions. So have you made a profit or. In this case, it's a profit of one and a half thousand dollars. Apple shares have risen from a hundred to $103.

That's a 3% rise, but your actual return is 30% because you only put up 10% of the purchase price in cash. So your profits are 10 times the rise in the show. In summary, you could have bought up with shares and made some money. If they rose. Instead you bought a CFD on apple shares and the profits were 10 times leveraged.

As we demonstrated one key feature of CFDs. Is this leverage or gearing? Another is that a trader can enter the market by selling an asset or going short. In this example, you believe that the gold price is about to fall. So you sell gold CFDs in the hope of being able to buy back the asset at a lower price and therefore make a profit closing.

Your open trade is also known as squaring. Your position warning leverage increases risk. You need to realize from our previous example that if apple fell by three. You be down to three and a half thousand dollars cash in your margin account. That's the original $5,000 less your losses of one and a half thousand.

That's a loss of 30%. Indeed. Your losses could exceed $5,000. If apple shares fell rapidly back to gold, which is trading at 1002, $1,006. You sell a CFD on 50 ounces at a thousand dollars. That's $50,000 of notional investment. In this case, you might put in 4% cash margin of $2,000. Your broker finances, the other 96% of the sale.

Now this trade then is 25 times less. Later in the day, gold has risen to 1,008 to $1,024. So you buy 50 ounces of gold as CFDs for 1020 $4. Each you'll Goldberg is now square. So have you made a profit or a loss in this instance, it's a loss of $1,200. The loss is because you sold. And the market rose gold has risen from 1000 to 1020 $4, which is a 2.4% gain.

But you are 25 times leveraged your losses are 60% of your cash margin. So you need to understand that as your initial cash margin is. Your broker will require extra cash to keep the position open as they would had apple shares fallen again. If the trade was left open beyond the first day, we would have to consider financing costs too.

But once more, let's keep the example simple by ignoring interest. CFDs are traded on. You only put up a percentage of the trade as collateral based on requirements set by your CFD provider. Therefore you can trade a position on a stock. Other asset classes can be traded via CFDs to without actually owning it as an asset.

Trading on margin means that as an investor, you rarely have to put up the entire cost of a trade as you would with a stocks investment. You're required to maintain a certain amount of margin in your account as defined by all CFD provider. But it's a fraction of the cost of buying stocks. Outright CFDs can be traded on a variety of assets and instruments from one account.

This means that you can set up a diversified portfolio, covering many different markets and have access to much wider trading options. Stocks indices commodities. The list goes on a CFD is an attractive alternative to other financial vehicles. CFDs, therefore allow you to explore many alternative. You can trade a CFD to benefit from a falling price or market.

For example, you might have concerns about buying individual stocks. Therefore instead of buying stocks, you could use CFDs to shore, to particular stock, or even the index and therefore gain potential profits from a falling market. CFDs are a mechanism that allow you to be an active, engaged trader, whatever the market conditions or your strategies.

CFDs can also have regional benefits or in some cases be banned. For example, in the UK, as you never own the asset, your CFD is not liable to stamp. Conversely, if you're an investor in certain parts of the world, CFDs are not a product you can purchase many CFD guides, present the concept as an extremely cost effective method of treating.

And they can be, but it's essential that you're aware of the entire process. In other words, all the costs associated with CFDs, for example, the cost of paying the spread on the entry purchase and exit sale can rule out any profits that have been made. If there had only been small movements in the price of the underlying asset.

So look carefully into which brokers suits your needs.

CFDs also have the benefit of being able to add a stop loss. This is an automatic mechanism whereby you can exit the CFD to chosen point before your loss pass. A certain level. CFDs are also a transparent mechanism. They are closely related to the buying and selling of stocks. And one stock usually equals one CFD whilst the process isn't complicated, like any financial product, it is still worth researching CFDs before you trade leverage is a fantastic way of making your money work harder, but there are two sides to leverage.

Whilst profits can be amplified due to a potentially small minimum outlay. Remember that the smaller, the initial margin, the higher, the leverage, therefore losses are magnified in the same way. Be aware that you are liable to pay losses incurred based on that, leverage something that is never encountered with stock trading.

The margin level can also be open to change by the CFD provider and therefore the investor may need to add additional funds. So let's summarize what you've learned. CFDs can be a cost-effective way of expressing your views on the market. By leveraging your account by using margin, you can buy and sell CFDs without committing all of your collateral because CFDs are a leveraged product.

The potential profits are magnified, but on the other hand, so our potential losses, your losses can exceed your initial hours. Be wary of the amount of leverage you're employing and make sure you understand the mechanism before entering into a trade. CFDs are flexible. You can trade a range of assets around the world, all from one CFD account.

Again, make sure you're only trading on products that you understand. You can make trades to benefit from a falling market. By selling a CFD, you can make a profit if and when the underlying asset falls in price.