The best way to explain how CFDs work is through an example:

1. XYZ Corp is trading at 1.00/1.10 and you think the price is going to rise in value.

2. You decide to go long, so you buy XYZ Corp at 1.10

3. You decide to trade 1000 CFDs and are charged £5 commission (for example).

4. You now own 1000 CFDs with a value of £1100.

5. If your margin requirement with your broker for XYZ is 5% you will need to have £55 allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £55 initial margin.

6. Three days later you see that XYZ Corp has risen to 1.30/1.40.

7. Therefore you choose to sell at 1.30 and realise your profit and are charged £5 commission.

8. You bought at 1.10 and sold at 1.30 which means XYZ Corp rose by 20 points 20 x 1000 shares = £200 profit.

9. You held the position for three days which means you incurred three nights financing charge. This equals £1100 (value of the position) x 8% (as an example) /365 (number of days in the year) x 3 (number of days position is held) = 0.72p. (Note: typically the finance charge may be adjusted for daily closing prices; if you are short you actually receive a financing benefit)

10. The financing and commission is deducted from the profit, giving you a profit of £189.28.

As with CFDs, the best way to explain how spread betting works is through an example:

1. Company ABC is currently trading at 5.50/5.60 and you think the price is going to fall in value.

2. So you decide to go short at 5.60 to open the position.

3. You decide to risk £10 per point.

4. As you anticipated, the stock ABC falls two days later to 5.00/5.10.

5. Therefore to close the position out you choose to buy at 5.00.

6. To summarise, you sold at 5.60 and 5.00 which means Company ABC fell by 60 points x £10/ point = £600 profit.