Contracts For Difference

CFDs are a derivative product designed for active traders who want to have extra leverage in their share trading. Instead of paying for purchases in full, they deposit a 'margin' with their broker (typically 20% of the total purchase value) and that margin requirement goes up and down in line with the rise and fall in value of their portfolio. In effect, the investor is able to speculate with much more money than he actually has by borrowing from his broker. The geared nature of the trade means that if an investment performs well, the returns will be higher through trading on margin. If they perform badly, the broker will require more margin payments which have to be paid in cash. Margin requirements vary and most brokers will ask for a large deposit before allowing a new client to trade on margin.