Contract for Differences (CFDs).

A Contract For Difference (CFD) involves trading the difference in the price of an asset at two different points, rather than holding the asset itself. It is an agreement between an investor and provider to exchange the difference between the nominal value of the asset at the time of the opening and closing trades.

Traders will determine the number of reference shares at the beginning of the CFD. These reference shares refer to the number of underlying shares that are specified in the initial agreement. The reference shares in a CFD simply track the price movement of these underlying shares. At the end of the CFD, its performance is calculated based on the value of the underlying shares.

Calculating the contract value of a CFD is straightforward - the number of reference shares stipulated in the agreement is multiplied by the value of the underlying shares.

When taking out a CFD you do not have to pay the full value of the shares, it's called trading on margin. Typically you will pay between 10% up to 25% of their actual value. As you never actually own the shares, you do not pay stamp duty either, unlike with share purchases. You do however pay Capital Gains Tax on any profits, as you do with normal share buying.

By investing in CFDs, you can choose to take either long or short positions. Opting for a long position means that you will make a profit if the contract value rises. Alternatively, taking a short position will see you gain if the contract value drops.This means that you can take advantage of both rising and falling share prices.

It's not for everyone though, because in the same way profit potential is geared, so too are losses, which can easily exceed original deposit.