Contract for Difference (CFD)
Definition of 'Contract for Difference (CFD)'
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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