What is a CFD?
A CFD - which stands for "Contract for Difference" - is an agreement to exchange the difference in value of a particular financial instrument between the time at which a contract is opened and the time at which it is closed.
In many ways, trading Contracts for Difference is similar to spread betting and indeed regular share dealing, but CFDs hold many distinct advantages over ordinary share dealing. This has made them increasingly popular as a way of trading the financial markets. Click here for an explanation of the differences between spread betting and CFD trading.
CFDs allow you to trade a huge range of markets, give you the flexibility to go long or short and as they are traded on margin you only need to put up a fraction of the capital associated with traditional share dealing and investing.
The prices quoted by Spread Co replicate the live market price, in that you are quoted a bid and an offer price on which you can trade. The major difference is that when you trade you don’t actually own the underlying asset, but a contract to exchange the difference in the value of the instrument when you close the trade. You do not pay additional commissions to trade with Spread Co and you don’t pay any stamp duty on your trades.
History of CFDs
CFDs originated in the UK in the 1980s. They were initially introduced by investment banks as an efficient mechanism through which institutional investors could hedge their exposures.
The CFD product was subsequently adapted from the institutional market and brought to a general audience in the 1990s and retail investors now have the opportunity to participate in all the benefits that CFDs have to offer. In light of this, CFDs have become extremely popular which is demonstrated not only by the number of new specialist firms offering CFDs, but also by their trading volumes.
CFDs are now regulated in Europe, Australia, New Zealand, parts of the Middle East, Singapore and Canada. As with any derivative, positions need to be hedged back to the physical market. Through various direct and indirect methods, it is thought that CFD hedges account for as much as 40% of all trades on the London Stock Exchange (LSE)*.
