A CFD (Contract for Difference) is a financial derivative that allows traders to speculate on the price movements of an underlying financial security. The Contract for Difference is an arrangement for one party to pay the difference in value from when the trade was opened to when it was closed. CFDs can be traded on 1,000s of markets, including commodities, currencies, indices and shares.
CFDs are a financial product devised in London in the 1990s, they were first used by hedge funds looking to short sell and place larger trades than could be executed in the underlying market. CFDs offered the perfect opportunity to trade with leverage and go long or short on 1,000s of financial markets whilst avoiding UK Stamp Duty.
The tech boom of the late 1990s provided a wealth of new markets ideally suited to CFDs, and CFD trading has now spread to other major financial centres. Approximately a third of the total volume traded on the London Stock Exchange is CFD related.