To see how easy it is to trade contracts for difference, just consider the following example. The actual costs will depend on your broker, but for the sake of the example let's assume that the broker allows leveraging of 10 to 1, that is, you need to invest 10% of the share value, and the rest of it is on margin, which means it is effectively borrowed from your broker.

Say that you thought IBM shares were going to increase in value. Rather than taking the traditional course and buying the shares directly, you decide to go long using a CFD. This means that you do not need so much money, or you may choose to take a larger position with IBM. You should also note that it is as easy to go short with a CFD when you think the price is going to go down.

IBM is trading at $105, and you want to trade 1000 shares. To buy the shares would cost you $105,000, but to buy the CFDs it will you 10% of that, that is $10,500. In each case there would be a dealing cost or commission from your broker.

As soon as you place the trade, you should put in a stoploss order which represents the point at which you want to exit the trade for a loss if the price does not go in the right direction. This is a recommended practice in all trading, and thus applies whether you are trading the shares directly, or if you are using CFDs.

There are many factors to consider in deciding how far down to put your stoploss, and you will be looking at recent share price movement to see how much you might expect the price to fluctuate. Ideally, you want to set a stoploss far enough away that general price fluctuations do not trigger it, but close enough that the stoploss will take you out of the trade if the price is making a definite move in the wrong direction.

You now have to wait and watch for the price to go up. If you had bought the stocks there are no further costs at this time, but if you're using CFDs you should expect daily interest charges to be levied. This is because you are effectively borrowing the other 90% of the value of the stocks. The interest rate will depend on your broker, and may be in the range of 0.02% per day, charged on the cost of the CFDs. For this example it might be a little more than two dollars per day. Costs such as this vary between brokers and can also be negotiated, depending how much you trade.

Suppose that, just as you had foreseen, the price of IBM rose to $108. Whether you are trading shares or CFDs, you might at this stage consider raising the value of your stoploss to lock in some profit. Setting the stoploss value above the price where you started the trade means that you are guaranteed to make a profit. Say the price rose some more, to $110, and this was the target that you expected with your trading system so you decided to take your profits.

There are two ways that you could exit this trade. You may decide, as suggested, that the price has risen as far as it is going to, and sell your shares or CFDs when they reach their target price of $110. On the other hand, with your trading system you may choose to raise the stoploss level, perhaps to $108, and wait to see if the price goes higher. If it does not, and the price drops back down to $108, then you exit the trade in the second way by your stoploss order working. If the price goes higher, then you can keep following it with your stoploss order, securing higher gains all the time.

What has been the effect of this activity? If you bought the shares for $105,000, and sold at $110, for $110,000, then you made $5000 less commissions, which might leave a net profit of $4960. This would keep you in nearly 5% return on your money, and if this happened within a couple of weeks you might consider that you had done very well.

If instead you bought the CFDs there is a little more calculation to be done. The CFDs cost you $10,500. Your broker has been charging you a couple of dollars a day in interest, say $30 if it took a couple of weeks for the price to rise. You still make the difference between the starting share value and the value of the stocks when you close the trade, so that is $5000. Taking off the commissions as well as the interest, your net profit might be $4930.

The point of this exercise is that you could have been doing nine other CFD trades with the amount of money that was tied up in buying the stocks. Another way of looking at it is that you would have made 4.7% on your money buying the stocks, and instead you made nearly 47% using CFDs.

If instead you believed the price of the stock was going down, then you could have shorted with the CFDs. In this case, you do not pay interest but instead receive interest each day. As long as you are considering short-term trading, the cost of the interest is not excessive, but it is nice that your account is credited when taking the short position.

The same basic format applies across all the CFD markets. You may just as easily trade in stock indices, not forgetting that you are able to trade in several markets. The basic principle that you are trading for a change in price, whether up or down, applies, so you will be looking for a financial product which has reasonable volatility, coupled with predictability to help with your trading decisions.