You can make money by correctly anticipating rises and falls in either individual shares or the stock market as a whole while avoiding the capital requirements of traditional share investing.
Of course, there is also significant potential for loss so you need to make sure you're aware of the risk to your money, and take steps to limit this whenever you trade.
As such if you're looking to trade CFD shares then it's important you find a broker with a service that suits you.
Therefore, it's sensible to compare brokers before you open an account. And, when looking for CFD brokers UK access is important if you want to trade on the FTSE indices.
What are CFD shares?
Share contracts for difference are contracts between you and another party to pay the difference between the opening and closing value of an underlying share in cash when the contract is ended.
You trade CFDs in a similar way to trading ordinary shares. The prices quoted by CFD online brokers are the same as the underlying price of the share and you can trade in any quantity.
However, unlike traditional share trading you never own the share itself and you don't pay the full amount of the transaction value upfront. CFDs share trading requires you to commit a much lower level of capital when you place the trade .
This is called 'leveraging'. It means you can achieve a much greater exposure to UK shares or the FTSE index than you can through traditional trading.
Although you will be liable for the full amount and more if things don't go your way.
For example, if you bought 10,000 shares at £5 per share using traditional share dealing, you would have to pay £50,000. If you were then able to sell the shares at £5.10 you would stand to make £1,000 which is a return of 2%.
However, if you had used contracts for difference you could have bought 10,000 contracts on the share for, say, a 10% margin (£5,000). This reduced cost is referred to as the 'CFD initial margin'.
If you were then able to sell at £5.10 you would still make a profit of £1,000, but your return on capital is now 20% (you have made a profit of £1,000 on an investment of just £5,000). The losses would be equal if the share price moved in a different way to that which you predicted.
What to look for when you're searching for the best UK share CFD trading account
With dozens of brokers competing for your business, it's important to shop around in order to find the best CFD share trading platform.
When you're searching for a UK share CFD trading account. Consider:
Whether the broker offers the UK markets you need
What commission the broker charges on CFD trading. This can typically vary from under 0.1% to 0.25% and can be significant if you plan to make a lot of CFD trades
Whether the CFD share trading platform offers mobile and online trading. This is useful if you want to be able to open or close a position at the optimum time
Whether the broker offers other markets as well as UK shares. Many providers offer other markets such as foreign shares or commodities
Apply for the account that offers the lowest commission for access to the markets and indices you want to trade on.