Introduction To Contract For Differences: cfd

Client Services : Spread Betting Opportunities : About the Editor

Cfds are derivative instruments that allow investors to gain exposure to an underlying instrument without taking physical ownership or possessing certain rights of ownership. As the name implies, contract for differences is essentially a contract between a client (you) and a broker to exchange the difference between the opening and closing value of the underlying instrument at a future date.

Until recently, trading in contract for differences was carried out almost exclusively by City professionals. However, they have since been made available to retail investors who have taken to the product very quickly such that the instrument is now one of the fastest growing financial products, representing a significant proportion of total equity volume in the London market.

CFD trading is now common place even among small private investors. When you trade a contract for difference, you are basically speculating on the direction of the future price movements of the particular underlying instrument. Typically, the contract is open-ended. When you decide to close the contract, your profit or loss is simply the difference between the opening price and closing price of the underlying instrument.

Put in another way, when you buy shares through a broker in anticipation of a rise in value, you would have to sell to realise the increase in value. So, if you had bought at 100p per share and then sold at 150p per share, you get the difference of 50p per share (less transaction costs such as commissions). Trading in contract for difference is designed to simplify this process so that the transaction only involves an agreement to settle the difference between the price at which you enter the position and the price at the time you decide to close the trade. Hence the name 'contracts for differences'.

While contract for difference can be structured to match any underlying financial instrument, the most common ones are designed to mimic individual equities and global equity indices.

Whether they are based on share or indices, the key feature of contract for differences remains the same. CFDs give the investor an equivalent economic exposure to buying or selling the actual physical security. Hence, if you are short an equity CFD, then as the price of the underlying share falls, the value of your contract increases.

Other popular articles on spread betting

Financial spread betting process explained

Simple moving average tools can enhance your spread betting profits

Spread betting gaps in stock prices

Market timing enhances your spread betting profits

Relative strength is a grossly underrated but highly effective spread betting tool

Free Market Forecast

Are you serious about winning at spread betting?

In the markets, timing is everything!

To get the next edition of my analysis of the short term outlook for the financial markets, enter your details in the box below and get pin-point accurate market analysis delivered straight into your inbox for free!

E-mail Address
Full Name

Don't worry — your e-mail address is totally secure.
I promise to use it only to send you Spread Betting Opportunities.