Contracts for difference

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1. What are CFDs?

CFD stands for 'Contract for Difference'. Strange as it sounds, the term accurately describes the nature of the trade: CFD traders speculate on the movement of a share price or index between the opening and closing dates of a 'contract', and the amount they gain or lose is calculated by the 'difference' between the two prices.

Let's kick off with a simple example:

Note that:

• The contract relates to a particular underlying share (or index), in this case M&S, and a particular number of them, in this case 3,000.
• You buy and sell the CFD, not the shares; at no point do you actually own shares.
• The contract does not have a fixed expiry date, but closes when you choose to close it.

A key feature of CFDs is that their bid/offer price is always the same as, or extremely close to, the bid/offer of the underlying share. So if M&S shares have a bid/offer of 399/401, so will the CFD. If the bid/offer on the shares rise, brokers will move their bid/offer on the CFD accordingly.

So far, so simple! Let's leave this page with two important lessons under our belt:

1. When you trade CFDs, you speculate on a rise or fall in the price of a share or an index, rather than in the share itself.
2. At no point do you actually own the underlying share.

1. What are CFDs? 2. The benefits of CFDs 3. Initial margin 4. Variation margin 5. Commission costs 6. Interest payments 7. Dividends 8. Example of a long and short trade 9. Comparison of CFDs to share investing 10. Comparison of CFD trading to spread betting 11. Types of order 12. Stop losses 13. Strategies: Pairs trading 14. Strategies: Hedging an equity portfolio 15. Opening an account with a broker 16. Conclusion

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