Instead of funding the entire cost of the total number of shares, a trader provides the CFD company with a deposit which is used as a ‘margin’ for the bet. This gives the trader access to a larger amount of shares than would be available to him if he were trading on the live markets.
The idea of trading on a margin is that the trader only pays a percentage of the quoted share price. A CFD company advertises a rate and so the trader is required to have a much smaller amount of money to start off with then if he was trading live on the share market.
This means that as little as 5% of the overall price of the shares is required as an initial payment on the contract. CFDs do not require the investor to purchase the underlying asset; therefore the CFD trader can hold positions much greater than would be possible in standard investment.
There is no fixed expiry date for CFD trading and so a trade is closed when the client feels it is right to collect their profits or to cut their losses if they have started to lose money.
