What are CFD's
History
CFD stands for Contract for Difference. These have been around for many years in different guises and are very straight forward. They are simply a vehicle to buy or sell financial markets like equities or commodities without having to put up the entire value of the trade, by trading on margin.
Equity CFD trading in its present form began in the 1990s. They were introduced by stock brokers to allow their hedge fund clients to gain large downside exposure to the market using high leverage. CFDs gave them exactly what they needed with the added advantage of not having to pay stamp duty.
This was the main market for CFDs for most of the decade, until the technology boom of the late 1990s began at which point the awareness of CFDs become more prominent. Traders then had the ability to speculate on the increased volatility of stocks using leveraged CFDs over a short time period.
Today CFD's are available on a vast array of markets, not just equities. They are also available to the retail user at home rather than just the City professionals.
Current reports estimate that as much as 25% of the UK stock market turnover is attributed to CFD trading. CFDs are also beginning to start trading in countries such as Australia, Canada and Singapore.
Trading
To trade CFD's you simply have to fund your account with whatever the required initial margin is for that product in the amount you wish to trade. For a stock like Vodafone for example, if the margin requirement is 5% then you only have to deposit that percentage of the value of the trade you wish to do. So to buy £50,000 worth of Vodafone shares you would only need to initially fund your account with £2,500.
Unlike physically buying a share, when you trade CFD's you do not physically own the share in that company. You are trading on the price of the market concerned, and when you close the trade the difference between the opening price and the closing price will determine how much money you make or lose. You do not have any entitlement to voting rights and are subject to corporate actions, but you do benefit from any dividends that are awarded.
