CFD or Contracts for Difference in general sense are derivative tools which give the investor the provision to speculate on the movements of the underlying asset price without having to own these assets. In Financial terms we can say that a contract for difference is a margin product which makes use of leverage to enable you to reap higher returns. That is, a change in the prices of shares and stocks is what gets you the rich returns here. The investor by using CFD’s does not end up paying the entire amount of the underlying asset. The term leverage or gearing is the ratio between collateral and the deal size and is used to describe the margin requirements. Let me try and explain this concept of leverages better with the help of an example. If a contract has a leverage of 1:10 then it simply translates into the fact that for opening up a new position for a contract here you will have to pay one tenth of the contract size as a deposit. That is on order to purchase $1000 worth of shares a deposit of $100 will have to be made by you. Trading of shares when done using these Contracts for difference brings to you a return of 100% as against the 10% profit generated by physical trading. But not to be disregarded is the fact that along with the many fold profits bought by the use of leverages there is always the association of the same amount of risk too with it.

The following factors have contributed substantially into making these CFD’s a very popular product amongst the investor community.

• The provision of leverages in these contracts for difference allows even small time investors to end up making good reasonable profits. A leverage ratio of 1:10 is most commonly used here for the purpose.
• A falling market too provides an opportunity to the investor dealing in CFD’s as he can short sell his CFD’s to profitable amounts.
• When compared to the costs involved in stock trading the cost involved here in CFD trading are very low and manageable. There are basically two major costs involved in CFD’s which are the interest and the leverage.
• Contract for differences provides you with the option to automatically stop losses. You thereby land up exiting from the trade at the right time when you actually intended to do and save yourself from the losses associated with getting out later than what you had intended to do.
• CFD’s also provide you the option of placing your orders during the night before you want to trade. I find this to be a big boon for the working individuals who can during the later half of the day and evening sit down and study the ongoing market at their own convenience and then make their decision of investing rather than hurrying through the process during the day when they are time deprived.

It is because of these above mentioned points and because of the relative ease of the entire process of investing via these contracts of differences that they have gained the popularity that they have today. At moderate costs these trading instruments provide you with the option of making moderate profits and getting decent returns.

If you find tracking the Dow Jones Industrial Average as confusing or frustrating as some do, there is a way to easily, cheaply, and accurately monitor its overall performance.  It’s called Dow Diamonds (DIA), and is bought and sold just like regular stock.  It carries a very modest 0.18% expense ratio, and can effectively track the DJIA’s performance.