Contracts for difference.
CFDs allow you to make money on share price movements without actually buying the shares. A CFD on a company's shares will specify the price of the shares when the contract was started. The contract is an agreement to pay out cash on the difference between the starting share price and when the contract is closed. CFDs can be used to gamble on shares falling (going short) as well as rising (going long).
When taking out a CFD you do not have to pay the full value of the shares - called trading on margin. Typically you will pay between 10% and 25% of their actual value. You do not pay stamp duty, unlike with share purchases, because you never actually own the shares. But you do pay capital gains tax on any profits as you do with normal share-buying.
Holders of CFDs are also entitled
to any dividends paid by the underlying company on which the contract is based during the CFD's life.
There are serious risks involved with CFDs. The contract is two-way and whilst the CFD provider will pay you if you have called the share price movement correctly, so will you have to pay him if you get it wrong. It is possible to lose much more money than you put down in the first place.
CFD brokers will always check the customer is aware of the risks and is good for the money. Commission charges of 0.25% of the face value of the contract are the norm for both opening and closing a transaction. Some brokers offer 'commission-free' trades, but the cost is generally factored in by setting a 'bid-offer spread' - the difference between buying and selling.
For an example click
here.
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