- Contracts For Difference
- Compare Contract For Difference Accounts
- Contracts For Difference (CFDs) Guide
- How to Choose CFD Broker
- CFDs vs Spread Betting
- CFDs vs Share Dealing
- Should I Consider CFDs?
- How to Make CFD Work for You
- Benefits and Drawbacks
- Risks with CFDs
- CFD Strategies
- Trades Pairing
- CFD as Type of Investment
- CFDs and Tax
- Recommended CFD Books
Contract For Difference (CFD) Trading Guide
Contract For Difference (CFD) is a contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller). For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on share price movements without the need for ownership of the underlying shares or paying full amount for them. In order to buy or sell CFD you would need to open an account with CFD provider. We provide a comprehensive and intuitive comparison service where you can compare and choose CFD brokers applying your own criteria.
Contract For Difference allow traders to take long (buy) or short (sell) positions, and unlike futures have no fixed expiry date or contract size. Trades are conducted on a leverage basis with margins typically ranging from 1% to 20% (for very volatile and/or small cap companies margin can be much higher).
CFD Features:
- No Stamp Duty. With CFD you do not physically buy shares.
- Low Capital Requirements. CFD are a 'margined' product.
- Ability to Go Long or Short.
- Huge Range of Markets. CFD are available for practically any market.
- Cap Your Potential Losses. Stop Losses and Limit Orders are available with CFD.
CFD History
CFD were originally developed in the early 1990s in London. Based on equity swaps, they had the additional benefit of being traded on margin and being exempt of stamp duty. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of UBS Warburg.
Initially they were used by hedge funds and institutional investors to hedge (or cover) their exposure to stocks on the London Stock Exchange in a cost-effective way.
In the late 1990s CFD were first introduced to retail (or private) investor. They were popularised by a number of UK companies, whose offerings were typically characterised by innovative on-line trading platforms that make it easy to see live prices and trade in real time. Investors quickly realised that the real benefit of trading CFD was not the stamp duty exemption but the ability to trade on leverage on any underlying instrument. In a nick of time many active traders and speculators were attracted to CFD as it was a cheap and effective way to speculate on market movements (remember that more buyers and sellers make products more liquid thus bring the cost/commission down). This was the start of the growth phase in the use of CFD.
The CFD providers (brokers) quickly responded and expanded their offering from just LSE (London Stock Exchange) shares to include most global stock exchanges, indices, commodities, treasuries and currencies. Note that trading index CFD, such as FTSE, DAX, CAC, Dow Jones, NASDAQ, S&P500 and many more, quickly became the most popular individual CFD that is traded.
At about the same time a number of CFD providers introduced financial spread betting to the UK investors. Financial Spread Betting has very similar features but it is tax free, making spread betting the fastest growing investment vehicle nowadays.
Over time CFD have expanded so much that about 25% of all LSE transactions are CFD related.