An introduction to Contracts for Difference (CFDs)

 
 
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Contract for Difference (CFDs) Explained

Contract for Difference (CFD or CFDs) are undoubtedly one of the most exciting new products to be made available to the individual investor in recent years. A contract for difference (CFD) is an agreement made between two parties to exchange, at the closing of the contract, the difference between the opening and closing prices of the underlying share, multiplied by the number of shares detailed in the contract. Contracts for difference (CFDs) can be traded on equities (shares), index trades, FOREX and commodities. CFDs are traded either as execution only or through advisory brokers.

CFD (CFDs in plural) can also be referred to as a contract for difference, contracts for difference, contracts for differences and contract for differences. They are generally referred to as a CFD or as CFDs.

Contracts for differences allow investors to take long or short positions and unlike futures, the contracts (CFD) have no fixed expiry date or contract size. Trades are conducted on a leveraged basis with margins typically ranging from 1% to 30% of the notional value for CFDs on leading equities.

CFDs were originally developed in the early 1990's in London. They are based on equity swaps (an exchange of cash flows between two parties that allows each party to diversify its income, while still holding its original assets), but they had the additional benefit of being traded on margin and being exempt of UK stamp duty.

Contracts for differences were initially used by hedge-funds (pooled investment fund, usually a private partnership, that seeks to maximize absolute returns using a broad range of strategies) and institutional investors to hedge their exposure to stocks on the London Stock Exchange in a cost effective way.

In the late 1990's contract for differences were first introduced to retail investors, as an OTC (over-the-counter: not listed or available on an officially recognized stock exchange but traded in direct negotiation between buyers and sellers) product and were popularised by a number of UK companies. Investors quickly realised that the real benefit of trading CFDs was not the tax exemption but the ability to trade on leverage on any underlying instrument. This was the start of the growth phase in the use of contracts for difference.

CFD providers quickly responded and expanded their offering from London Stock Exchange (LSE) shares to include most global stock exchanges, indexes, commodities, treasuries and currencies.

Trading index contracts for differences, such as the ones based on the major global indexes e.g. Dow Jones, NASDAQ, S&P 500 and FTSE, quickly became the most popular individual CFD that is traded.

At about the same time a number of the CFD providers introduced financial spreadbetting to the UK. This has a very similar economic effect as contract for differences, but made them in effect tax free. This was specific to the UK tax environment and this has not been replicated in other countries.

There are significant advantages of trading CFDs (contacts for differences) with Blue Index over conventional forms of trading and spread betting:


With these innovative contracts you can reap all the economic benefits of share dealing, without actually physically owning the shares. Blue Index now offers an efficient and flexible alternative for experienced investors.

Blue Index specialises in trading Contracts for Differences (CFDs). We will provide you with an unbiased personal trading service giving you as much or as little advice and monitoring as you require. We offer execution only services as well as full service advisory accounts.

Through us you can trade all the major Global Exchanges as well as gain exposure to all the major financial instruments. You can trade contracts for difference on the individual Equities (e.g. Vodafone, Microsoft); on Indices (e.g. FTSE 100, S&P); Forex (e.g. Euro/Dollar, Dollar/Yen) as well as Commodities (e.g. Gold, Oil).

Trading CFDs is inherently more risky, and potentially more rewarding than ordinary share dealing.  Please make sure you understand the risks involved, for more information see our sections on Leverage and Risk.

For any more questions you have or to find out about opening an Online CFD trading account with Blue Index please call us on 020 7398 2555.
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