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What is a CFD?

CFD or Contract for Difference is an agreement between two parties to exchange, the difference between the opening and closing prices of shares multiplied by the number of shares mentioned in the contract, at the closing of the contract. It is a contract between the trader and the dealer.

With a CFD you can participate in the share trading without actually buying the underlying share. You can also study a shares performance or index without actually buying it. Each Contract for difference has a specific contract value. This is the number of shares in the contract multiplied by the underlying shares price. This contract value changes simultaneously with a change in the underlying shares value.

These contracts for difference are traded on margin and the buying and selling price determines the profit or loss. As CFD's trade on margin, an investor needs just a little part of the actual index price for trading. Any major corporate action is also mirrored by a CFD. Contracts for difference are basically a method by which you get exposure to the market at a price which is just a small percentage of the shares actual price.

Its origination...

Contracts for difference were introduced as a product by the derivative desk of Smith New Court (Merrill Lynch) in London in the first half of 1990s. The original concept of CFD was originated within the wholesale sports markets and was later executed for the financial markets. With the World Wide Web boom in the end 1990s, a London based company GNI Group developed means to trade directly online on the Internet in the London Stock Exchange.

Today, CFD's contribution to the UK FTSE exchange have exceeded about 40% and about 25% of UK Stock Markets turnover are contributable to CFD's.

Markets...

CFD's are also introduced in other countries and markets like, 2002, introduction in Australasia and recent introduction in Canada and the Far east market of Singapore. With Contracts for difference you can trade with the following markets.

UK - All stocks with a market capitalization above £50million
US - S&P500 & NAZDAQ100 stocks
Australia - ASX
Germany - DAX 100 & NEMAX 100
France - CAC40
Holland - AEX
Italy - MB 30; Midex; Mibtel; Numtel
Spain - IBEX
Finland - HEX
Belgium - BEL 20
Switzerland - SMI
Sweden - OMX
Ireland - ICI

CFD Trading...

As mentioned above a CFD is a product that is related with the price of the underlying share and traded on margin. This margin varies 10% upwards depending on the markets volatility and also the individual stocks volatility. The advantages of CFD include increased flexibility, increased leverage, no stamp duty and more conventional form of margin trading.

To invest in a CFD you can do it yourself, consult a broker or a CFD provider. There are even CFD courses for those who want to learn more about it.

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