Various advances over the last 10 years have served to level the financial markets playing field for private investors around the world. The initial driver behind this change was technology – as computers became another household appliance and high-speed internet connections became the norm, the delivery of information such as breaking news, market prices and orders to buy or sell became easier than ever.

It is not surprising then that contracts for difference (CFDs) have enjoyed such strong growth in popularity over the same period. Previously they had been almost exclusively the preserve of major financial institutions, but this technological leap forward opened them up to a whole new audience.

Another reason for the CFD boom is transparency. The financial industry is renowned for its love of jargon, but the concept behind a CFD is straightforward – it mimics the movement of an underlying market. So if for example, the price of Amazon shares rises from $125 to $130 – the CFD will follow suit. If you would like to take a position using CFDs, equivalent to owning 100 shares in Amazon, then you simply buy 100 CFDs.

The gyrations in various markets over recent years have also helped to boost the appeal of CFDs. In many countries it has historically been difficult for clients to “short-sell” markets – particularly individual equities. With CFDs it is just as easy to sell as it is to buy, so if you believe a particular share is likely to fall over the next couple of months, or even that the price of gold will drop over the next few hours, you are able to position yourself to profit if the market drops.

A further attraction of CFDs is the wide range of available markets. There have always been ways for private investors to trade – individual shares, foreign exchange, commodities, bonds, stock indices – but with CFDs this can all be done from one account. And, unlike with the futures markets, when using CFDs the size of the exposure can often be tailored. For example, if an IG Markets client wants to trade stock indices such as the Dow Jones, or forex pairs such as EUR/USD, there are “mini” contracts available allowing the risk to be kept to a level with which the client feels comfortable.

On the subject of risk control, as CFDs are margined products it is important to understand that they may not be suitable for everybody. However, there are plenty of tools available to ensure that risk can be kept to a reasonable level.

Stop-losses are a widely-accepted way of ensuring that a trade is automatically closed at a pre-determined level. CFD providers were certainly well ahead of traditional brokers in offering these as standard on online trading platforms. With IG Markets, there is also another type of risk control that can put an absolute limit on risk from the moment the trade is placed. That is the guaranteed stop loss. With a guaranteed stop, even if the market is moving very quickly and leaving “gaps” – jumping from one level to another, missing out a range of prices in-between – the trade will always be closed out at the guaranteed stop level. This offers a level of risk control not easily available in the underlying market, meaning clients need not worry about a larger-than-expected loss due to a freak event or unexpected news.

On top of all of this are the trading platforms and tools available to CFD traders. Once again, CFD companies have led the way here, with a massive range of analytical features and tools such as advanced charting software, pattern recognition programmes, SMS alerts and mobile phone trading applications. Some platforms, including IG Markets’ PureDeal, offer Direct Market Access (DMA), allowing clients to interact with the underlying market. This has a range of advantages, including enabling clients to place trades directly into the SETS order book at the London Stock Exchange.

CFDs are one of the best ways of trading a wide range of markets if you have a short- to medium-term view on direction. While all of this can seem a little daunting at first glance, there is a whole host of resources available to guide you through. At IG Markets there is even a demo account facility, which allows users to practise trading and try out the platform without risking any real money. IG Markets runs regular online seminars and its website contains hours of free educational videos that explain CFDs and trading strategies in further depth.

David Jones is Chief Market Strategist at IG Markets