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Nowadays, a growing number of retail investors use CFDs both as part of their trading portfolio and as an alternative to physical share trading. This group includes both shortterm frequent traders as well as long term investors looking for a flexible alternative to margin lending.

Another key reason retail investors decide to use CFDs in their portfolio is due to being able to access many of the worlds markets all from the one account. Instead of needing several trading accounts, retail investors can now trade many of the worlds markets including Gold, Oil, Silver, Foreign Exchange plus others all from the one account held in your local currency.

Let's take a closer look at CFDs and how they work

If you have ever traded the normal share market then you will pick up and understand CFDs very easily. Trading CFDs is very similar to trading the normal shares except you only need a small amount of money up front in order to fund that position. Although CFDs are a leveraged product it is important to understand that you the trader control how much you wish to have in the market at any one time.

Contracts for Difference (CFDs) allow you to receive most of the benefits of owning a security without having to actually own the security. In other words you do not take delivery of the security so any difference in the price between when you buy the CFD and when you sell it is settled in cash. The difference is either profit or loss.

CFDs are also available on indices (like the Aussie 200) and baskets of securities. CFDs in relation to baskets of securities are known as Sector CFDs. For example instead of looking to buy one of the better performing bank stocks you may wish to purchase a sector CFD enabling you to take a view on the whole financial sector instead of a single share CFD.

With CMC Markets you have 10 sectors to choose from including health, materials, finance and energy to name a few. One of the big benefits of trading sectors or indices with CMC Markets is that there is no commission due on this product. That is largely why sectors are such a favourite amongst our CFD traders.

Buying and selling the performance of a security or index using a CFD is similar to buying the actual underlying instrument using a loan.

You could borrow $10,000 from a bank to buy shares. You would receive the returns from the shares, but would pay interest on the loan to the bank. CFDs combine this process in a single transaction.

Let's take a look at a sample trade

You may be looking to buy AUD$10,000 worth of an Australian share like BHP. As BHP is one of Australia’s top 20 stocks CMC Markets we let you trade with only 3% margin. What this means is for a $10,000 position you will need $300 (3% of $10,000) up front in order to fund that position.

Immediately you can begin to see the leverage effects and the power of putting you money to work for you. If BHP was to rise 3% in value then you would have made $300 gross profit from an initial outlay of $300, which equates to 100 percent return cash on cash! This is what excites many people about CFDs, the fact that you only require a small amount of money up front in order to control a much larger position. Keep in mind the full $10,000 value of the BHP position will be subject to the share price performance. If you want to keep the Share CFD position overnight you must pay a financing charge on the total notional value of the position at the Financing Rate. Usually the financing rate for long positions is the overnight cash rate plus two percent. If a Share CFD position is not carried overnight you will pay no financing charge.

As with the underlying securities, Share CFDs allow you to benefit from normal market movements. Your open positions are valued every night at the close of business prices. Profits or losses are credited / debited to your Account each day. Adjustments relating to corporate actions, such as dividends, bonus issues and reconstructions in respect of the underlying security are also applied to your account should they occur.

More about CMC Markets CMC Markets is a pioneer of CFD trading in Australia. Our goal is to empower Australian traders by giving you access to CFDs over Australian and global markets and the ability to trade on leverage and potentially profit in almost any market condition. We run regular CFD introduction seminars and education courses around Australia for traders new to CFDs and are committed to providing a cost effective CFD trading service. Click here for more info or to start trading CFD's.