What am I actually buying when trading in CFDs
The economic effect of a CFD from your point of view is very close to the effect of owning the stock. If the stock goes up, you make money. If it goes down you lose money. If it pays a dividend, you get that dividend. You'll typically pay commission for buying and selling the CFDs in a similar way to the commission on stock purchases, though one of the advertised advantages of CFDs is that the commission will be lower. They also often have tax advantages, for example in the UK you don't have to pay stamp duty on CFDs. In theory you are exposed to credit risk on the CFD issuer, which you aren't with the real stocks: if the issuer goes bankrupt, you may lose any money you have invested regardless of how well the stock has performed. It's certainly similar to a bet, but not much more so than investing directly in the stock. In practice the issuer of the CFDs is likely to hedge its own exposure by actually buying the underlying stocks directly, but they can aggregate across lots of contracts and they would tolerate some unhedged exposure to the stock, so they can cut down on the transaction fees. You also won't get the same voting rights as the underlying stock would grant you. The product itself is a derivative as it derives its value from another stock or commodity.  It's similar to a US option, which offers (in the case of a 'call') the right, but not the obligation to buy a stock at a predetermined price before a certain date. But, unlike the US option, instead of buying the stock, the contract is only closed out in cash. I've made the analogy to betting, so I believe it to be a fair comparison. I hope this question is theoretical. You should never buy a financial instrument with no clue how it works. CFDs (Contracts for Difference) are basically a contract between you and the broker on the difference in price of the underlying between the time you open a position and close a position. You are not actually buying the underlying. With share CFDs, the outcome is a bit like buying the underlying shares on margin. You pay interest for every day you hold the CFDs overnight for long CFDs. However, with short positions, you get paid interest for every day you hold your short position overnight. Most people use CFDs for short term trading, however they can be used for medium to longer term trading just as you would hold a portfolio on margin. What you have to remember is that because you are buying on margin you can lose more than your initial contract amount. A way to manage this risk is by using position sizing and stop loses. With your position sizing, if you wanted to invest $10,000 in a particular share trading at $10 per share, you would then buy 1000 shares or 1000 CFDs in that share. Your initial expense with the CFDs might be only $1000 (at a margin rate of 10%). So instead of increasing your risk by having an initial outlay of $10,000 with the CFDs you limit your risk to the same as you were buying the shares directly.
No, it's not a good idea. You started by saying you'd like to invest, but then mentioned something that's not an investment, it's a speculation. Both Forex and CFDs are not really investments. They are a zero sum game where over time, it's a pool of your money, the other trader's money, and the broker, redistributed over time.  If you truly wish to invest, you'll read up on the process, understand your own long term goals, and put aside X% (say 5-15) of your monthly income. You should look into investments that are long term, and will fund your retirement 30-40 years hence. &gt; If the buyside was showing demand, what's wrong with HFT for reacting with supply?  In my example, HFT isn't actually adding supply/liquidity.  They're just grabbing it and flipping it.  &gt; The example you gave is akin to me going from car dealership to car dealership yelling loudly about what car I want and the price I'd like it at - would you be upset if someone heard you and decided to sell their car to you later down the line?   Not the same.  The equivalent would be me yelling about wanting to buy a Porsche 911, and you buying them all before I can finish my own purchase, then offering to resell them to me at a higher price.  &gt;In this case, the buy side trader is being stupid.   Maybe - certainly if all this could be eliminated by avoiding market orders.  This is a major critique many people have with Brad K. Instead of serially going from exchange to exchange, he could have sent orders to all exchanges at the same time (parallel!) and likely received much better prices.   He did do this at his time at RBC - sent orders to all exchanges at once.  The result would be apparently liquidity (asks at the market) disappearing and his orders getting filled at higher prices.  &gt;In my opinion, the HFT player here is simply facilitating price discovery by reacting to demand - as a market maker that's his job.  I think that's a misinterpretation of what these particular HFTs are doing.  &gt;Here's a good article. Let me know what you think.  Interesting.  It certainly goes against a lot of what Lewis wrote.  And I suppose that's the problem... very few of us are actually qualified to say what is actually true.  I know little about market structure and, as I said, have no involvement in high liquidity stocks.  The fund managers next door to me also trade pretty illiquid stuff that I strongly doubt any HFT ever touches, and they're value investors anyway, not arb HFs or something. Just got back from the office, so I can better answer it now. The trader uses the Metatrader platform, which is programmed with a language based off C++. I'm working with him to update some algos now. His strategies running on ToS are more or less proof-of-concept that he streams right now as he sources investors. You can but there is no point trading CFD's seeing you may still lose more than your investment due to slippage As Waldfee says, CFDs are a derivative (of the underlying stock in this case). If you are from the USA then they are prohibited in the USA as has also been mentioned. They are not prohibited, however, in many other countries including Australia.  We can buy or short sell (on a limited number of securities) CFDs on Australian securities, USA securities and securities from many other countries, on FX, and different commodities. The reason you are paying much less than the actial stock price is worth is because you are buying on margin. When you go long you pay interest on overnight positions, and when you go short you recieve interest on overnight positions (that is if you hold the position open overnight). Most CFDs are over the counter, however in Australia (don't know about other countries) we also have exchange traded CFDs called ASX CFDs. I have tried both ASX CFDs and over the counter CFDs and prefer the over the counter CFDs because the broker provides a market which closely but not exactly follows the underlying prices. Wlth the exchange traded CFDs there was low liquidity due to being quite new so there was the potential to be gapped quite considerably. This might improve as the market grows. All in all, once you understand how they work and what is involved in trading them, they are much easier than options or futers. However, if you are going to trade anything first get yourself educated, have a trading plan and risk management strategy, and paper trade before putting real money on the table. And remember, if you are in the USA, you are actually prohibited from trading CFDs. Regarding the price of AAPL at $50, the price should be the same as that of the underlying stock, it is just that your initial outlay will be less than buying the stock directly because you are buying on margin. Your initial outlay may be as little as 5% or lower, depending on the underlying stock. CFDs should not be used as a buy and hold strategy (which is risky enough doing with shares directly). However, with proper money and risk management and the proper use of stop losses, a medium term strategy is very plausible.  I was using CFDs in the past over a short time period of usually between a couple of days to a couple is weeks, trying to catch small swings with very tight stops. I kept getting wipsawed due to my stops being too tight so had too many small loses for my few bigger wins. And yes I lost some money, almost $5k in one year. I have recently started a more medium term strategy with wider stops trying to catch trending stocks. I have only recently started this strategy and so far have 2 loses and 3 wins. Just remember that you do get charged a financing fee for holding long position overnight, buy for short position you actually get paid the funding fee for overnight positions. My broker charges the official interest rate + 2.5% for long positions and pays the official rate - 2.5% for short positions. So yes CFDs can be used for the longer term as long as you are implementing proper money and risk management and use stop losses. Just be aware of the implications of using margin and all the costs involved. Thanks for your reply. I’m not familiar with the term “Held-For-Trading Security”. My securities are generally held as collateral against my shorts. To clarify, I am just trying to track the “money in” and “money out” entries in my account for the shorts I write. The transaction is relatively straight forward, except there is a ton of information attached! In simple terms, for the ticker CSR and short contract CSRUQ8, the relevant entries look something like this: There are no entries for expiries. I need to ensure that funds are available for future margin calls and assignments. The sale side using covered calls is as involved. S&P/TSX 60 VIX (CAD) is an equation and as the implied volatility of two close to the money TSX 60 options change, the output changes. This is why the intra-day price fluctuates on a graph like a traded product.  Although VIXC can't be traded, it can still be used as an important signal for traders. The excerpt is from slide 12, more information can be found here. https://www.m-x.ca/f_publications_en/vixc_presentation_en.pdf Futures (stage 2) Options, ETFs, OTC Products (stage 3) have not been implemented. Futures exchanges are essentially auction houses facilitating a two-way auction. While they provide a venue for buyers and sellers to come together and transact (be that a physical venue such as a pit at the CME or an electronic network such as Globex), they don't actively seek out or find buyers and sellers to pair them together. The exchanges enable this process through an order book. As a futures trader you may submit one of two types of order to an exchange: Market Order - this is sent to the exchange and is filled immediately by being paired with a limit order.   Limit Order - this is placed on the books of the exchange at the price you specify. If other participants enter opposing market orders at this price, then their market order will be paired with your limit order. In your example, trader B wishes to close his long position. To do this he may enter a market sell order, which will immediately close his position at the lowest possible buy limit price, or he may enter a limit sell order, specifying the price at or above which he is willing to sell. In the case of the limit order, he will only sell and successfully close his position if his order becomes the lowest sell order on the book. All this may be a lot easier to understand by looking at a visual image of an order book such as the one given in the explanation that I have published here: Stop Orders for Futures Finally, not that as far as the exchange is concerned, there is no difference between an order to open and an order to close a position. They're all just 'buy' or 'sell' orders. Whether they cause you to reduce/exit a position or increase/establish a position is relative to the position you currently hold; if you're flat a buy order establishes a new position, if you're short it closes your position and leaves you flat. Yes, just set aside the amount of money. If you buy a cfd long in a stock for a 1000$, set aside 1000$. If you buy a cfd short, set aside the same amount and include a stoploss at the value at which the money is depleted. In this case however, you can stil lose more, because of opening gaps. By doing this, you replicate the stock return, apart from the charged interest rate. I am relative newbie in the financial market trading and as I understand it, the response from Victor is accurate in respect of trading CFD contracts. However, there is also the option to 'trade' through a financial spread betting platform which as its name suggests is purely a bet based upon the price of the underlying stock/asset. As such, I believe that your theory to short a stock just prior to its ex-dividend date may be worth investigating further... Apart from that, it's worthwhile mentioning that financial spread betting is officially recognised by HMRC as gambling and therefore not currently [2015/16] subject to capital gains tax. This info is given in good faith and must not be relied upon when making any investment and/or trading decision(s). I hope this helps you make a fortune - if it does; then please remember me! You can trade an index by using a Contract For Difference, or CFD. Various brokers offer this method and the spreads are quite low. They tend to widen outside of market hours, and not all brokers offer the same spreads. I would look for a broker that offers the lowest spread on the index you are interested in. You should also do your due diligence and check they are regulated by the relevant authority  pertaining to their territory, eg FSA for uk A CFD broker will let you open a trade on margin as long as your account balance is more than the margin required on all your open trades. If the required margin increases within a certain percentage of your account balance, you will get a margin call. If you then don't deposit more funds or close losing trades out, the broker will close all your trades. Note: Your account balance is the remaining funds you have left to open new trades with. I always use stop loss orders with all my open trades, and because of this my broker reduces the amount of margin required on each trade. This allows me to have more open trades at the one time without increasing my funds. Effects of a Losing Trade on Margin Say I have an account balance of $2,000 and open a long trade in a share CFD of 1,000 CFDs with a share price of $10 and margin of 10%. The face value of the shares would be $10,000, but my initial margin would be $1,000 (10% of $10,000).  If I don't place a stop loss and the price falls to $9, I would have lost $1,000 and my remaining margin would now be $900 (10% of $9,000). So I would have $100 balance remaining in my account. I would probably receive a margin call to deposit more funds in or close out my trade. If I don't respond the broker will close out my position before my balance gets to $0. If instead I placed a stop loss at say $9.50, my initial margin might be reduced to $500. As the price drops to $9.60 I would have lost $400 and my remaining margin would now only be $100, with my account balance at $1,500. When the price drops to $9.50 I will get stopped out, my trade will be closed and I would have lost $500, with my account balance still at $1,500. Effects of a Winning Trade on Margin Say I have the same account balance as before and open the same trade but this time the price moves up. If I don't place a stop loss and the price goes up to $11, I would have made a $1,000 profit and my remaining margin will now be $1,100 (10% of $11,000). So my account balance would now be $2,000 + $1,000 - $1,100 = $1,900. If I had placed a stop loss at say $9.50 again and the price moves up to $10.50, I would have made a profit of $500 and my margin would now be $1,000. My account balance would be $2,000 + $500 - $1,000 = $1,500. However, if after the price went up to $10.50 I also moved my stop loss up to $10, then I would have $500 profit and only $500 margin. So my balance in this case would be $2,000 + $500 - $500 = $2,000. So by using stop losses as part of your risk management you can reduce the margin used from your balance which will allow you to open more trades without any extra funds deposited into your account. As many people here have pointed out, a CFD is a contract for difference. When you invest in stock at eToro, you buy a CFD reflecting a bid on the price movement of the underlying stock, however, you do not actually own the stock or hold any rights shareholders have. The counterparty to the CFD is eToro. When you close your position, eToro shall pay you the amount representing the difference between your buy and sell price for each stock.  I suggest you read the following article about CFDs, it explains everything clearly and thoroughly: http://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp#axzz2G9ZsmX3A As some of the responders have pointed out, and as is mentioned in the article, a broker can potentially misquote the prices of underlying assets in order to manipulate CFDs to their advantage. However, eToro is a highly reputable broker, with over 2 million active accounts, and we guarantee accurate stock quotes. Furthermore, eToro is regulated in Europe (Germany, UK, France, etc.) by institutions that exact strict regulations on the CFD trading sector, and we are obligated to comply with these regulations, which include accurate price quoting.  And of course, CFD trading at eToro has tremendous benefits. Unlike a direct stock investment, eToro allows you to invest as much or as little as you like in your favorite stocks, even if the amount is less than the relevant stock price (i.e. fraction stocks). For example:  if you invest $10 in Microsoft, and on the day of execution eToro’s average aggregated price was $30 after a spread of 0.1%, you will then have a CFD representing 0.33 stocks of Microsoft in your eToro account. In addition, with eToro you can invest in stock in the context of a social trading network, meaning that you can utilize the stock trading expertise of other trader to your advantage by following them, learning their strategies, and even copying their stock investments automatically. To put it briefly, you won’t be facing the stock market alone!  Before you make a decision, I suggest that you try stock trading with an eToro demo account. A free demo account grants you access to all our instruments at real market rates, as well as access to our social network where you can view and participate in trader discussions about trading stocks with eToro, all without risking your hard earned money. Bottom line – it’s free, there are no strings attached, and you can get a much firmer idea of what trading stocks with eToro is like. If you have any further questions, please don’t hesitate to contact us through our site: www.etoro.com. A perpetuity in the mathematical context is the equation in your link. A perpetuity in the legal sense is a liability that never matures, presumably paying endlessly, except for a banknote that pays nothing.  An example would be UK war bonds during WWII. Real estate can be modeled like a perpetuity for convenience, but it is not a legal obligation to pay forever if one excludes taxes. If one starts with capital and ends with a perpetuity, one has bought a perpetuity.  If one starts out with nothing and ends with capital by way of a perpetuity, one has sold a perpetuity.