A contract for difference (or CFD) is a contract between two parties, buyer and seller, agreeing to exchange the difference in the value of a security, instrument or other asset between the time at which the CFD is opened and closed.

For example, when applied to equities, such a contract is an equity derivative that allows investors to speculate on share price movements, without the need for ownership of the underlying shares.

CFDs are a versatile product growing in popularity as a short term investment tool. They provide an efficient way to increase the power of your investment capital, can help you diversify an existing portfolio or hedge an open position.

A CFD is a derivative of an underlying asset. You don't physically own the underlying asset, but can participate in its price movement. Unlike traditional stocks and shares this allows you to potentially profit in both rising and falling markets. CFDs provide investors with the opportunity to take long or short positions. Unlike futures contracts, CFDs have no fixed expiry date or contract size.

If you believe that a company or a market will experience a loss of value in the short term, you can use CFDs to sell it today, with the expectation that you can buy it back in the future. As always, if the price of your trade moves against you, your position will result in a loss.

CFDs are a highly leveraged product enabling investors to increase the power of the capital they have available to invest. You are required to hold only a percentage of the total value of the contract. To open a CFD trade, you need to deposit only a fraction of the total trade value, usually ranging from 1% to 20% of the notional value for CFDs on leading equities, allowing you to take a larger position than would be possible if you needed to fund it in full.

Because, CFDs provide the ability to go short / long, they can be used to provide hedging capabilities against short term price corrections in an existing portfolio. Because, CFDs provide the ability to go short / long, they can be used to provide hedging capabilities against short term price corrections in an existing portfolio.

Example, if you have a long-term portfolio that you wish to keep, but you feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by 'hedging' your position. If the value of your portfolio falls the profit in the CFDs should offset it.

CFDs are a costless alternative solution to the costs that would be incurred if they were to exit their position prematurely.

Due to leverage, investors can convert existing equity portfolios to CFDs releasing the capital difference, whilst still maintaining the same level of exposure to the underlying security.

CFDs allow you to trade major indices and global stock markets from a single trading account. CFDs trading give you easy access to a wide range of markets and commodities that would not otherwise be available to retail investors.

Always consider your risk appetite and your investment strategy. Leverage magnifies profits, but also losses. CFDs are therefore not for everyone.

Unlike traditional stocks and shares if the market moves against you significantly, it is possible to lose more money than your initial investment.

You do not own the underlying security meaning you are not a shareholder and have no voting rights.

Trading CFDs carries a high level of risk to your capital and is not suitable for all customers. Furthermore, margined products use leverage to increase the level of exposure to the product, and as a result your losses may substantially exceed your initial deposit and require you to make additional deposits at short notice. Prior to trading leveraged CFDs, you should carefully consider your investment objectives, experience and risk appetite and should not invest money that you cannot afford to lose. You should ensure you fully understand the risks and seek independent financial advice if in doubt.

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