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text courtesy of Wikipedia
Leverage
One of the benefits (and risks) of trading CFDs is that they are traded on margin meaning that they provide the trader with leverage. Leverage involves taking a small deposit and using it as a lever to borrow and gain access to a larger equivalent quantity of assets. The margin requirements on CFDs are low meaning that only small amount of money is required to take large positions.
[edit]Stop loss orders
A stop loss order can be set to trigger an exit point as pre-determined by the trader e.g. Buy at $3.00 with a stop loss at $2.60. Once the stop loss is triggered, a sell signal is activated to the CFD provider and actioned in accordance with their terms of business and taking into account available liquidity to action the request. DMA providers typically receive the stop loss value via the phone or online ordering and will place the order in the market to be actioned at the pre-determined price to a limited price range e.g. to a maximum 6c further,and providing there is matching liquidity. If the stop loss price is triggered and the price then rapidly moves outside the 6c range in this example, or there is insufficient liquidity for your order and considering other people that have orders at that price point, your stop loss sell order may not be triggered and you remain in the position.
Market makers have the ability to manage the stop loss and when a stop loss order is triggered, they can close the position wherever they see that matching price and quantity are available. This increases your chances of getting out of a position that is going against you, albeit at a potentially inferior price to what you were expecting.
One of the problems with the price of a stop loss order is that it is only a target price. It depends if the market price actually trades at that level. If the underlying instrument price 'gaps' i.e. it moves past the stop price in one step, the stop will get executed at the next price that was traded or not at all depending on the CFD provider. This is normally not a problem on very actively traded products like indices and currencies, but can be an issue on equity prices, particularly for stocks that have low liquidity. It is also a problem when stock markets are closed, and the difference between the close on one day and the open on the next day is significant (for example: if there has been news about a stock overnight that impacts company profitability).
To mitigate this problem, some providers offer 'Guaranteed Stop Loss Orders' (GSLO) whereby the trader pays a premium for a price to be guaranteed should a stop loss price be triggered. As well as the additional charge, there are normally other restrictions. The closest a guaranteed stop loss order can be placed is typically 5% from the current price and providers usually have specific terms and conditions on the orders however they can be effective if exiting at a set price is important.
