Contracts for Difference

CFD is short for Contracts for Difference. The official definition is that a Contract for Difference (CFD) is an agreement between two parties to exchange the difference between the opening price and the closing price of the contract, at the close of the contract, multiplied by the number of shares specified within the contract.

Contracts for difference (CFD), previously only available to professional, finally became available to individual investors in late 1999. An equity CFD is a derivative instrument designed to replicate the economic performance and the cash flows of a conventional share investment. CFD is a margin traded product, which allows investors to receive all the benefits of owning equity without actually having to own the physical equity, in the underlying company. Margins are typically calculated at 10% of each trades notional value. CFD is traded, quoted and performs in the same manner as the physical equity.

Contracts for difference (CFDs) are one of the most exciting rather new products available to the retail investor, which allows him to go short as easily as go long in a more cost effective and simpler manner than stock borrowing. This in turn opens up strategy possibilities such as "pairs trading”. There are now a number of brokers offering these products, which are rapidly growing in popularity with investors interested in short term trading or those seeking to gain leverage.

But, CFDs are for the experienced investors! Particular caution should be exercised when dealing with derivatives products. Potential investors should ensure that they understand the nature of derivatives products and the potentially high risks involved in investing in such products, and that they are satisfied as to the suitability of their proposed investments in the light of their personal financial situation.

CFDs can be traded in UK, US and European stocks (UK FTSE Index, FTSE 350 London Stock Exchange, Dow Jones Industrial, NASDAQ Future Index, DAX Index