Buy a share using mostly someone else's money and you can double, triple or multiply by up to 20 times the wins or losses compared with just buying the shares. That's the big attraction - and danger - of contracts for difference (CFDs), the most popular and fastest growing trading instrument in Australia.

It's called leverage, and is also known as gearing. If you have to put up only 5 per cent of the shares' value, then you can buy $10,000 worth of shares for just $500.

When the share price moves from, say, $10 to $11, you make a gain of 10 per cent. Your shares rise in value from $10,000 to $11,000 and you just made 200 per cent on your $500 capital.

That's the power of leverage. But it works to magnify losses as well. If the shares fall from $10 to $9 you lose $1000, or more than you put up in the first place.

Now you're required to pay the losses, which means another $500 of your money on top of the initial amount you put in. Because of the risks involved, it's important to use only risk capital - or money you can afford to lose.

If you're wondering why anyone would take such risks, remember that the upside potential is striking.

If you can get an edge by finding a method that tells you which way the market is probably going to move, you can make more money on winning trades than you lose on the losing ones. Over time, potentially large gains are possible, based on the principle that by cutting losses and letting profits run, the winners will outweigh the losers.

Unfortunately, getting such an edge requires work, as well as practice, tenacity and, more than anything else, the ability to either control or ignore emotional decision-making that works against the discipline required to make money over time.

Professional traders - those who have successfully learned to trade the markets to make a living have a trading plan. This sets out the market conditions under which they buy or sell, and a risk-management system that ensures they get out of a trade if it starts to move against them.

Every successful trader has a set of rules for deciding when to enter and exit the market, based on analysis of charts. These are graphs of past price movements, studied on the assumption that the market - that is, the people participating in it - is constantly reacting as it has in the past to good or bad news about particular shares.

Good traders carefully limit the amount they risk on any one trade - usually to 1 per cent of total risk capital - and they use stop-loss orders, which order their broker to quit the market when a price move against them reaches a certain level.

Charts are examined to see if the market is repeating a previous series of movements. If so, then it is more likely to move in a given direction and a trade based on this analysis has a higher probability of winning.

Professional traders know they only need a slight edge. If their chart analysis is right only 50 per cent of the time - ideally a little more than this - then their risk management rules of getting out of losing trades early and staying with winning trades will help ensure they can make money over time.

Nevertheless, most part-time traders end up losing money. Estimates vary but the majority gradually fritter away their risk capital, usually because they are unwilling to study and follow the rules of risk management and trading discipline.

Here are six ways to make best use of CFDs:

1 Trading shares. CFDs have become the most popular means for trading - as opposed to investing - in shares, and perhaps 50 per cent of the CFDs traded in Australia are share-related. Depending on your provider, you can trade just the top 50 or 100 shares, or almost any share listed on the ASX.

2 Short selling. It's an important feature of CFDs that they can be used to sell a share you don't own in anticipation that it will fall in price. This strategy - short selling - can be so counter to the normal way of trading that beginners avoid it. But this may mean missing out on big wins, as markets often fall faster than they rise. Short selling may also be used for portfolio hedging (see point 6).

3 Trading share indexes. Rather than speculating on which way a particular share will move, you can trade the market as a whole using CFDs based on an index such as the S&P ASX 200, or, depending on your provider, even indexes of individual sectors such as financials or resources.

It is also possible to trade CFDs based on other markets around the world, the most popular being the US, Japanese, British and German sharemarkets. Other indexes in the local time zone include those relating to sharemarkets in Hong Kong and Korea.

4 Trading currencies. If you think the value of the Australian dollar will rise against the US dollar, you can trade CFDs as a way of profiting from that view. Foreign exchange, or forex, is among the fastest-growing sectors of CFDs trading. You can trade any major currency against any other; the most popular are the US dollar, the British pound, the Japanese yen and the European euro.

5 Trading commodities. Some providers offer access to CFDs based on the prices of such popularly traded commodities as oil, gold, copper and other metals, agricultural commodities such as coffee and industrial commodities such as rubber.

6 Portfolio hedging. This is the one use of CFDs that involves reducing risk. If you're worried that your share portfolio will drop in value because of a bear market in shares, you can use CFDs to short sell some or all of your shares. If the shares do drop, the CFDs will make up some or all of the loss. It's like selling your shares temporarily so that you're not affected by market falls - but without triggering capital gains tax. It's important to closely monitor the position and to use stop-loss orders carefully when hedging in this way.