A Beginner's Guide to Leveraged Stock Market Opportunities - Contracts For Difference (CFD)

One of the most common reasons for people to get started in trading Contracts for Difference (CFDs) is after hearing the amazing gains friends or co-workers have made when trading this exciting product.

While it's great to hear of the success people have when trading CFDs it's important for those looking to get started to learn the basics before jumping in head first.

This basic tutorial guide will touch on the essential basics to understand when looking to trade Contracts for Difference (CFD).

The first thing to understand when it comes to trading a CFD is that it is exactly like trading the stock market, except you need a small amount of money up front. This is known as your CFD margin. When trading the ASX or the UK Stock market you will mostly need around 10% margin in order to open your positions.

So if you wanted to trade Woodside Petroleum (WPL) shares or Vodafone (VOD) shares and you wanted to take a $10,000 initial position then you would need around $1,000 up front in order to control the whole position.

CFD margin rates do differ from one broker to another so its best to check out the respective brokers website to see what their margin rates are. As a rule of thumb, you can trade the top 200 CFDs with most CFD brokers with only 5-20% margin up front.

Who do I borrow the money off for the rest of the position? In actual fact, when trading a CFD you are effectively borrowing the whole amount of money, regardless of the margin you put up front. In the example above, a $10,000 CFD position is the same as borrowing $10,000.

There are 2 things to keep in mind when holding a CFD position. Are you going to hold the position overnight or are you going to exit before the day is over?

One fantastic aspect of CFD trading is that buying and selling a position on the same trading day does not incur any overnight interest. So a day trader could open a $100,000 position in the morning and exit before market close and they would not have to pay interest on borrowing those funds. Fantastic isn't it?

If you hold a position overnight then you need to pay CFD financing, which is a small daily fee and usually equates to the overnight cash rate (reserve bank rate) plus 2%. If you are trading in Australia and the current reserve bank rate is 7.25% then you will pay 7.25% plus 2% (9.25 %) per year calculated as a daily rate. This debit will hit your account every day you hold the position overnight.