A contract for difference (or 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 investors to speculate on share price movements, without the need for ownership of the underlying shares.

CFDs provide investors with the opportunity to take long or short positions.  Unlike futures contracts, CFDs have no fixed expiry date or contract size. Trades are conducted on a leveraged basis with margins typically ranging from 1% to 20% of the notional value for CFDs on leading equities.

WHY TRADE CFD's?

LEVERAGE YOUR INVESTMENT POTENTIAL

CFDs are traded on leverage, so you can increase your exposure to an underlying asset from the same initial investment.  To open a CFD trade, you need to deposit only a fraction of the total trade value, usually around 1-20 percent, allowing you to take a larger position than would be possible if you needed to fund it in full.  Leverage is great news if the market moves in the direction that you expect, but it carries a high degree of risk if the market moves against you.

TRADE FINANCIAL MARKETS AROUND THE WORLD

CFD trading gives you access to a wide range of markets that would not otherwise be available to retail investors.  It is as easy to trade on the price movement of commodities such as oil or gold as it is to trade an individual equity.  CFDs also allow you to speculate on whole indices or sectors from a single trade.

PROFIT WHEN MARKETS FALL AS WELL AS RISE

By ‘going short’ (selling), you can profit from a falling market as easily as you could profit from a rising market by buying it.  If you believe that a company or a market will experience a loss of value in the short term, you can use CFDs to sell it today, with the expectation that you can buy it back in the future. As always, if the price of your trade moves against you, your position will result in a loss.

HEDGE OTHER INVESTMENTS

As CFDs offer the ability to go short as easily as long, they can be used to provide ‘insurance’ against price falls in an existing portfolio.  For example, if you have a long-term portfolio that you wish to keep, but you feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by ‘hedging’ your position. If the value of your portfolio falls the profit in the CFDs should offset these losses.