What is a Contract for Difference?
What is CFD trading?
Simply put, CFDs are trading contracts for difference. It is a way of speculating on a particular market that doesn’t require the buying and selling of any underlying assets. This type of financial instrument allows you to benefit from the fluctuations in the price of stocks, commodities, indices and more without really purchasing them. CFDs are available on a wide range of different assets including global indices, stocks, currencies cryptocurrencies and commodities.
A Brief History of CFDs
CFDs first took shape in the financial sector in London around the early 1990s. The invention of them is often credited to Brian Keelan and Jon Wood, of UBS Warburg. While working on their Trafalgar House deal, they realized that CFDs could be utilized as a type of equity swap to be traded on margin.
Initially used only by hedge funds and institutional traders to hedge their stocks in the London Stock Exchange, CFDs were beneficial because they also allowed to bypass the UK transaction tax (or stamp duty) since no actual physical shares were exchanged. From there, they boomed locally.
Growth of CFD Trading
It didn’t take long for CFD Trading to move its way into the UK retail sector, allowing traders to see prices and to trade in real time. And by the early 21st century, the majority of CFD providers had launched simultaneous spread betting operations alongside their CFD offerings to avoid the Capital Gains Tax in the UK.
Hence, CFD providers realized the advantage of focusing principally on CFD Trading, expanding operations globally within a matter of years. Soon, CFDs had spread to Australia and many other countries and overseas markets.
Advantages of CFD Trading
CFD Trading is quick and accessible, removing the need of ownership and results in lower margin requirements, as well as a complete avoidance of day trading rules. Moreover, CFD trading comes with fewer or no fees. Traders like CFDs because there’s no expiry date or time decay and it is easy to trade a wide range of underlying financial instruments.
There are some market risks associated with CFD Trading; however, CFDs are more effective at speculating on the market with regulations and overall efficiency in mind, generally outweighing those risks when handled properly.
CFD Trading has been a widespread practice in the financial sector for almost 30 years. While it has grown and bloomed, and changed only slightly over the years, the benefits for relatively safe and legal market speculation make it a sophisticated tool for investors and traders of all kinds.
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