Contract for difference

In finance, a contract for difference (CFD) is a contract between two parties, typically described as "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). In effect CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.

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.

CFDs are available in Australia, Austria, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand. They are not permitted in a number of other countries – most notably the United States, where due to rules about over the counter products, CFDs cannot be traded by retail investors unless on a registered exchange and there are no exchanges in the US that offer CFDs.

CFDs were originally developed in the early 1990s in London as a type of equity swap that was traded on margin. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of UBS Warburg, on their Trafalgar House deal in the early 90s.

They were initially used by hedge funds and institutional traders to hedge cost-effectively their exposure to stocks on the , mainly because they required only a small margin and because no physical shares changed hands avoided the UK tax of stamp duty.

In the late 1990s CFDs were introduced to retail traders. They were popularised by a number of UK companies, characterized by innovative online trading platforms that made it easy to see live prices and trade in real time. The first company to do this was GNI (originally known as Gerrard & National Intercommodities); GNI and its CFD trading service GNI touch was later acquired by MF Global. They were soon followed by IG Markets and CMC Markets who started to popularize the service in 2000.

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Wikipedia