TRADING IN CFDS ON SHARES
What is Shares Trading?
CFD trading is very similar to shares trading except that when you trade a contract for difference, you don’t own the underlying share. Unlike investing in stocks, when you trade CFDs, you are not buying or selling the underlying asset. What you purchase is a contract between yourself and Top Invest 100.
The critical difference between trading a CFD long and buying security is due to the leverage that is employed. Contracts for difference are traded on margin, which means that there is no need to tie up the full market value of purchasing the equivalent stock position. This also allows traders to open larger positions than their capital would otherwise allow.
On a share CFD with a 5% margin, you can gain exposure up to twenty times as many shares for the same capital outlay compared to an investor in physical stocks.
For instance, suppose you buy 5 shares of Google at $400, you would have to pay $2000 ($400 x 5). But if you purchased 5 Google CFDs at $400, and the margin requirement was 10%, you would only be required to fork out $200, leaving you money to use on more trades.
The net effect is a return (or loss) of 10+ times the amount using CFDs over shares due to the leverage that is employed. The fact that CFDs are traded on margin (which means that your broker is effectively lending you money) implies that a contract for difference trade attracts finance charges while a position is held, while this does not apply to the share trade.