CFD trading is essentially about deciding whether you think a share price, or a commodity, will go up or down in value in the future and then backing your judgement.

A CFD or contract for difference is an agreement to exchange the difference in value of a financial instrument between the time at which it is opened and the time at which it is closed. The amount you win or lose is designated by the difference in the price you bought at and the price you sell at multiplied by how many contracts you hold .

How does it work?

For every financial instrument the provider will quote you two prices, the bid and the offer price. If you think the value of a particular financial instrument looks set to rise then you would buy at the higher (offer) price and sell at the lower (bid) price.

Put simply, you would ‘sell’ (go short) if you think the share price of Barclays likely to fall or ‘buy’ (go long) if you think it more likely to rise. The degree to which the market moves in the direction you predicted will dictate how much money you make or lose.

What are the advantages?

Greater leverage. CFDs are margined products, allowing you to benefit from increased leverage. By paying a small deposit you can take a much larger position than you would if you were trading the actual instrument in the market. Because CFDs can mean large profits as well as losses it’s important you take a sensible attitude to risk .

Huge choice of markets. From indices, to shares, to forex trading, sophisticated online trading platforms give one point of access to literally thousands of markets around the world .

Direct Market Access. If the CFD provider offers Direct Market Access then this means your contracts will be opened at the underlying market price in the order books of the world’s stock exchanges.

Considerations when choosing a provider

Experienced or novice, find a provider who provides educational resources that will help both the beginner and the more experienced trader alike.These usually take the form of educational courses and online learning seminars.

Try to ensure that you choose a trading platform that offers fast and accurate execution of trades and is reliable.

IG Markets is one of the leading CFD providers in the UK, they offer free daily forex commentary, expert analysis and also a free demo to help you get used to their trading platform. Visit IG Markets today.