Contracts for Difference, also known as CFDs, are a financial agreement between two trading partners to swap the difference between the opening and closing value of a contract. Contracts for Difference are a financial derivative and are traded without actual ownership of the underlying financial instrument on which you are speculating.

For many investors, two of the key features and attractions of a CFD are:

• The ability to use a CFD to go short of a market
• Leverage

Going short is speculating on a market to fall. This means that you can, potentially, profit whether prices are going up or going down.

A CFD is traded using leverage, in other words, traders typically put down a deposit or percentage of the total trade value. As your position in the market is greater than your invested sum, you can potentially stand to profit more than you would without using leverage. Leverage helps to magnify your profits. However, it is important to be aware that leverage can also work against you, because losses are also magnified.

Contracts for Difference Tax Benefits

Contracts for Difference relate to, but do not entail, ownership of the underlying financial instruments in the market you are trading in. As a result, investors do not pay stamp duty* on CFD trades.

Contracts for Difference — Risks and Risk Management

As outlined above, the use of leverage can be risky, because both profits and losses are magnified and losses can potentially exceed the value of your initial deposit. If not monitored and/or stemmed at a manageable level, the falling value of your trades can result in serious losses.

Contracts for Difference, however, can be traded using risk management tools. Whether you think the market will rise or fall, you can add a Guaranteed Stop Loss order to your trades.

A Guaranteed Stop Loss order acts as a safety net; it will stop your potential losses at a level that you can set. Put another way, a Guaranteed Stop Loss will close your trade if it hits a certain levels. This means that you can calculate, in advance, the level of your potential losses should the market move against you.

It’s also worth noting that a Guaranteed Stop Loss limits your downside but not your upside.

Contracts for Difference — Markets

You can trade a broad range of markets through Contracts for Difference. Some of the most popular markets are the FTSE 100, the Dow Jones, EUR/USD, GBP/USD, gold and crude oil.

Contracts for Difference Brokers

There are a range of Contracts for Difference brokers like ETX Capital and IG Markets however note that opening in account isn’t guaranteed. All applications are subject to terms and conditions. For more details see Contracts for Difference brokers.

Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.

Contracts for Difference. last edited by F. Lawson. 15-Sep-11.

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