CFD stands for Contract For Difference. It is a contact between two parties in which the seller will pay to the buyer the difference of the current asset value and its value at contract time. This is based on a positive difference. However, if the difference is negative, the buyer pays the seller. This allows traders to take advantage of prices moving up (also known as long positions) or moving down (short positions) of the underlying financial instrument. In essence it is trading of various derivatives without actual ownership. CFD trading is a component of the day trading market.
Credited to Brian Keelan and Jon Wood, CFD’s were developed in early 1990 in London as an equity swap of sorts. They were traded on margin. Originally used by hedge funds and institutional traders to hedge their exposure on the London Stock Exchange, they were made available to retail traders in the late 1990’s. CFD’s were further popularised by a number of UK companies. Around 2000 people realised that the benefit of CFD’s was the ability to leverage any underlying instrument. This kick-started the growth of CFD usage. CFD providers quickly expanded their LSE offering to include others.
CFD’s can currently be traded in United Kingdom, Hong Kong, The Netherlands, Poland, Portugal, Romania, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, Norway, France, Ireland, Japan, Austria and Spain.
CFD trading carries a risk of capital loss.