Contract for Differences (CFDs) are an equity derivative or agreement to exchange the difference in value of a particular share or index between the time at which a contract is opened and the time at which it is closed.
As one of the fastest growing trading instruments, CFDs suit most trading strategies and can complement existing investing methods. CFDs are favored by novice traders because of their simplicity and also attractive to sophisticated investors who are looking to gain from short-term volatility.
If you were to buy a CFD on a stock that is $5.00 and the price rises to $5.50, then you profit from that increase in price.
So if you bought 100 CFDs of that stock, your profit would be $50. That is, the value of the CFDs mirror the underlying stock prices, and you can profit on this movement.
You can just as easily sell CFDs short as well, and therefore profit from falling markets. This is possible without the need for ownership of the underlying shares and is sometimes referred to as a trade on margin.
What are they similar to?
In terms of the derivative's family tree, CFDs sprout from the futures and options branch. The closest cousin to CFDs is spread betting, which works on similar principles in that you are trading on margin and you can go long or short on a position. However, in monetary and experience terms, there is a higher level of barrier to entry for CFDs.
It is usually possible to trade across a vast range of financial instruments from a single account. This includes shares, indices, commodities and currencies across international markets.
CFDs do not grant ownership of the underlying asset, just access to the price performance including any dividend or corporate action equivalent. Because CFD traders do not hold the physical asset, any benefits associated with direct share ownership, such as shareholder voting rights or an invitation to the company’s AGM, are not available.
No Stamp Duty
As CFDs are a derivative product there is currently no stamp duty to pay when trading CFDs on UK equities.
Leverage / Gearing
CFDs make use of the 'gearing' principle. This enables investors to increase their percentage return, and losses, on investments.
Short (Selling) as well as Long (Buying)
CFDs also provide you with the ability to sell the assets you are trading. If you perceive a fall in the market value of an instrument then you can choose to short sell. By short selling a CFD, you can benefit from any fall in the asset value.
Listed purely alphabetical order are several of the more well known dealers.
* Barclays Dealers * City Credit Capital (UK) * City Index * CMC Markets * GCI Trading * GFT Global Markets * IG Markets * gtltrading.com * Man Financial * MFGfx