But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strateg

One of the most popular options is to open an account with a firm that trades CFDs - contracts for difference.

Contracts for what? Okay we are getting into a fairly specialised arena here, although CFDs are becoming more mainstream. Essentially, they are nothing more than a sophisticated wager that allows you to bet on a falling share price, as well as a rising stock movement.

Now here's the wrinkle - there are no shares involved in the transaction. Instead the broker agrees to pay the difference between the starting share price and the price when the contract is closed. Hence CFD - contract for difference.

But beware, this is a two way bet.

So, if your instincts are wrong then you could end up owing a lot of money - often more than you had initially staked.

So why not buy the shares? Well, you can buy a contract at a fraction of the face value of the shares - usually 10-25pc of the value.

They are a much cheaper way of dealing shares, particularly if you are a frequent trader.

With CFDs there is also the advantage of not having to pay stamp duty. However, you still have to pay capital gains tax on your winnings.

So how does it work in practice?

Well, let's say you want to buy shares in BT the traditional way. Your Internet broker quotes you 500-505 (meaning he will buy them from you at 500p and sell them to you a 505p).

So you buy 1,000 at 505p shortly before the quarterly results. The figures are good, the shares shoot up to 555p and you make ?500 profit on the transaction.

But then of course you pay stamp duty on the deal and had to stump up ?5,050 to buy the stock.

A CFD trade would be slightly different.

You are given the same quote by the broker - 500-505. You buy - but at a fraction of the price, say for the sake of argument, ?505 (a not unrealistic 10pc of the face value).

The shares head in the same direction and you make a ?500 profit on the investment, almost doubling your money.

So where do the shares fit in as part of a CFD transaction?

Unbeknown to you, the broker has gone out and bought or borrowed the shares. A total of 1,000. But rather than passing them on to you, he keeps them in a company account and simply passes on the profits, or God forbid, the losses from the share movement.

Shorting

Let's take BT as the example again. In this alternate universe you have a very good hunch that the share price is about to go down, rather than up. Perhaps the results are poor or the firm is overvalued.

As I said earlier, CFDs are a favourite among those wishing to sell short in the market. However your traditional stockbroker will tell you there is no chance of taking a short position.

Basically, there is no facility to sell stock you don't have.

So you call your CFD broker and he says no problem. Why? Well quite simply, the CFD firms have found away around the problem, thanks mainly to big fund managers who lend them stock for a fee.

Right, I know your head is starting to hurt….

But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strategy

But beware, this is a two way bet.

So, if your instincts are wrong then you could end up owing a lot of money - often more than you had initially staked.

So why not buy the shares? Well, you can buy a contract at a fraction of the face value of the shares - usually 10-25pc of the value.

They are a much cheaper way of dealing shares, particularly if you are a frequent trader.

With CFDs there is also the advantage of not having to pay stamp duty. However, you still have to pay capital gains tax on your winnings.

So how does it work in practice?

Well, let's say you want to buy shares in BT the traditional way. Your Internet broker quotes you 500-505 (meaning he will buy them from you at 500p and sell them to you a 505p).

So you buy 1,000 at 505p shortly before the quarterly results. The figures are good, the shares shoot up to 555p and you make ?500 profit on the transaction.

But then of course you pay stamp duty on the deal and had to stump up ?5,050 to buy the stock.

A CFD trade would be slightly different.

You are given the same quote by the broker - 500-505. You buy - but at a fraction of the price, say for the sake of argument, ?505 (a not unrealistic 10pc of the face value).

The shares head in the same direction and you make a ?500 profit on the investment, almost doubling your money.

So where do the shares fit in as part of a CFD transaction?

Unbeknown to you, the broker has gone out and bought or borrowed the shares. A total of 1,000. But rather than passing them on to you, he keeps them in a company account and simply passes on the profits, or God forbid, the losses from the share movement.

Shorting

Let's take BT as the example again. In this alternate universe you have a very good hunch that the share price is about to go down, rather than up. Perhaps the results are poor or the firm is overvalued.

As I said earlier, CFDs are a favourite among those wishing to sell short in the market. However your traditional stockbroker will tell you there is no chance of taking a short position.

Basically, there is no facility to sell stock you don't have.

So you call your CFD broker and he says no problem. Why? Well quite simply, the CFD firms have found away around the problem, thanks mainly to big fund managers who lend them stock for a fee.

Right, I know your head is starting to hurt….

But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strateg

So you buy 1,000 at 505p shortly before the quarterly results. The figures are good, the shares shoot up to 555p and you make ?500 profit on the transaction.

But then of course you pay stamp duty on the deal and had to stump up ?5,050 to buy the stock.

A CFD trade would be slightly different.

You are given the same quote by the broker - 500-505. You buy - but at a fraction of the price, say for the sake of argument, ?505 (a not unrealistic 10pc of the face value).

The shares head in the same direction and you make a ?500 profit on the investment, almost doubling your money.

So where do the shares fit in as part of a CFD transaction?

Unbeknown to you, the broker has gone out and bought or borrowed the shares. A total of 1,000. But rather than passing them on to you, he keeps them in a company account and simply passes on the profits, or God forbid, the losses from the share movement.

Shorting

Let's take BT as the example again. In this alternate universe you have a very good hunch that the share price is about to go down, rather than up. Perhaps the results are poor or the firm is overvalued.

As I said earlier, CFDs are a favourite among those wishing to sell short in the market. However your traditional stockbroker will tell you there is no chance of taking a short position.

Basically, there is no facility to sell stock you don't have.

So you call your CFD broker and he says no problem. Why? Well quite simply, the CFD firms have found away around the problem, thanks mainly to big fund managers who lend them stock for a fee.

Right, I know your head is starting to hurt….

But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strateg

Shorting

Let's take BT as the example again. In this alternate universe you have a very good hunch that the share price is about to go down, rather than up. Perhaps the results are poor or the firm is overvalued.

As I said earlier, CFDs are a favourite among those wishing to sell short in the market. However your traditional stockbroker will tell you there is no chance of taking a short position.

Basically, there is no facility to sell stock you don't have.

So you call your CFD broker and he says no problem. Why? Well quite simply, the CFD firms have found away around the problem, thanks mainly to big fund managers who lend them stock for a fee.

Right, I know your head is starting to hurt….

But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strateg

But lets look at the mechanics. Instead of buying, you sell BT at 500p. As you predicted, the results weren't so good and the shares drop to 450p. At this point you cover off the short position, netting a ?500 profit on 1,000 shares.

In order to sell short, the CFD broker had to borrow 1,000 shares from a fund manager, which are then sold in the market.

When the short position is covered out, the stock is bought back and returned to fund manager.

What will it cost ?

You should normally expect to pay commission charges of 0.25pc of the face value of contract for both opening and closing a transaction. Some brokers offer commission-free dealing, but you will find this is offset by the poorer buying and selling terms.

So, what have we learned? If your investment strategy is buy and hold shares for decades, CFDs aren't for you. However aggressive and frequent stock traders find them a dream. Be warned, don't get involved if you are not absolutely certain what you are doing. The losses can be horrendous.