What is CFD, CFD is a derivative investment tool. It is a contract between you and the broker.
So when you buy an investment via CFD.Sounds a bit confusing right, let give you a simple explanation. One explanation i like to use for people in Malaysia is this. We all know that Malaysia have TOTO right. there are two ways of buying TOTO, one is you go to the official shop to buy TOTO. and number 2 you go to coffeshop down the road of your house and look for an uncle who sits there who you can buy TOTO from. The result is the Same!! tomorrow when you look at the newspaper and your number is come out. If you bought from the official channel you can claim from official channel, But if you bought it from uncle in the coffeshop.you can claim it from the uncle in the coffeshop.
SO if you are investing in a stock through CFD .It is almost the same like you invest in TOTO through the uncle in the coffeshop. However, one difference is CFD is REGULATED INSTRUMENT , but the TOTO underground is not regulated.
CFD is a contract between you and the broker ,where it allows you to participate in the price movement of the investment of your choosing.So why people want to invest in stock through CFD? when you actually don't own the stock. Why must you invest in something that you can own, why people want to do that. the answer is LEVERAGE. leverage is the reason why CFD is getting popular among investor.
How it works? =)
let say you have been studying amazon stock. It is currently price at $1000 per unit. but then you very confident in a few daays to the priice will increase by 10% to $1100 per unit.
For example you set your goal is to profit $1000 . to achieve that goal you have to buy 100 units of amazon stocks.
SCENARIO A
you use a normal stock brokerage account, what you need to do to buy 100 units amazon stock, you haave to deposits &100000 into your account. 3daays later amazon stock went up as predicted to &1100 to one unit. so what you do is you sell off the 100 units ( $110000) valued of amazon stock and you profit $1000 from this trade
SCENARIO B
you dont have $1000 but you have a CFD account.which your broker gives. you a leverage of 100 times.since you only have $1000, with 100 time s of LEVERAGE .you only need to deposit $10000 into your deposit account to buy 100 units of amazon stock bia CFD. 3 days later amazon stock went up as predicted by You to $1100 per unit.so you close your trade with the brokers ,and now you get profit $1000 from this trade toooo
But there are is a huge difference in capital
SCENARIO A , you used $100000 to make $1000. that is 10% profit
SCENARIO B, through a CFD brokerage you use $1000 to make $1000 .thaat is 100% profit
But do remember this, the leverage facility can reaaly magnify your earning and make a lot of money. but! it also can magnify your losses and make you lose a lot of money. So when you trade with laverage faacility, please be very carefull. please be very sure of what are you doing.Do remember 65% of people who trade with CFD lose money