| The stock market has undergone a spectacular | | | | the value falls excessively. |
| revival over the past 12 months, recovering well from | | | | Rather than actually buying shares outright, there is |
| the initial impact of the global meltdown. Many of the | | | | also a secondary market known as CFD trading. CFD |
| individuals that are making profits from the stock | | | | trading enables an individual to benefit from rising |
| market are doing so using Contracts for Difference | | | | stock prices without the need to buy the share itself. |
| (CFD) trading, rather than purchasing shares outright. | | | | If you are tempted to begin CFD trading, it is |
| Until fairly recently, the vast majority of trading on | | | | essential that you understand how the prices of |
| the stock market was done via brokers, with | | | | CFDs fluctuate. |
| individual investors passing their business through the | | | | When buying CFDs you are not actually buying stock |
| brokerage. However, internet technology has allowed | | | | in any company. You are buying a contract that is |
| the investor to have more choice on how to interact | | | | based on the value of a particular stock. Using Apple |
| with the stock market. Individuals can now operate | | | | as an example, were Apple’s share price to rise |
| and maintain their own accounts via virtual brokers, | | | | then the value of a CFD based on Apple will similarly |
| receiving no advice and paying a minimum level of | | | | rise. Conversely, if Apple’s share value was to |
| commission. | | | | fall after the purchase of a CFD, then the |
| Such execution-only stockbrokers process your | | | | contract’s value would similarly fall. CFDs are |
| transactions according to your instructions. Because | | | | directly tied to the value of a stock, leading many |
| there is no human interaction and no advice given, | | | | people to question why investors don’t just buy |
| the cost of processing those transactions is far | | | | shares instead. The answer is that you can use |
| cheaper. Of course, such trading should be | | | | leverage to improve your investing returns. Instead |
| undertaken only by individuals who can afford to lose | | | | of having to pay the going rate of a stock, you can |
| their investment and are confident in their knowledge | | | | pay a percentage. This can be as little as five per |
| of stocks. | | | | cent. |
| People buy shares in the belief that the underlying | | | | Whilst leverage creates the potential for the |
| company will both grow and generate profits, | | | | realisation of greater percentage profits from |
| thereby adding to the overall value thereof. | | | | high-priced shares, it also works in reverse; any fall in |
| However, if it is anticipated that the company will | | | | the value of a CFD can prove very costly indeed. If |
| face financial hardship or some other obstacle, then | | | | you do decide to dabble in CFDs, make sure you do |
| investors will often offload or sell their shares before | | | | so wisely! |