CFD stands for Contracts For Difference, a derivative commodity in which you profit from shifts in stock and share prices. If you purchase a CFD on a stock that is $5.00, for example, and the price increases to $5.50, then you benefit from the shift in price. So, if you purchased 1000 CFDs, then your profit will be $500. That is, the value of the CFDs represents the underlying stock prices and this trend will benefit you.
Here are the reasons why CFDs are a very popular trading product:
1. CFDs are traded on leverage
This leverage is typically 10 to 1, with some CFD brokers providing 20 to 1 leverage. This means that a trader with a small float can make decent profits from trading the stock market by using CFDs. For example, you may have a stock trading system that makes a 30% return per annum. On a $5000 float, this is $1500 profit in one year. With CFDs, because of the leverage, the same system can now produce a 300% return, which is a $15 000 profit in one year.