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Contract for Difference (CFD)

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Definition of 'Contract for Difference (CFD)'

A CFD is an agreement between two parties to settle, at a predetermined date/time, the difference between the opening and closing prices of the contract, multiplied by the number of underlying units (e.g futures contracts) specified in the contract.

Each CFD is a negotiated contract and because there is no standardization for CFD's they trade on the OTC (aka off-exchange) market.

CFD's are derivatives and as such are attractive to investors who trade leveraged instruments.

CFD's have some key advantages:
  • They are traded on margin.
  • You can trade them short or long.
  • There is not stamp duty.
  • You may be entitled to dividends.

And there are obviously also some disadvantages:
  • Gearing will magnify losses.
  • No investor rights (voting etc.)
  • Not suitable for long term investments because of the erosion of the time element.

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