CFD Trading – What is it and Why is it Popular?

A CFD or Contract for Difference is an agreement between a “buyer” and a “seller”, where the seller agrees to pay the buyer the difference between the current price of a financial asset, and its price at a pre agreed point in the future. The CFD is a relatively new financial derivative that has many similarities to spread betting and many CFD Brokers offer both services. Spread betting still remains the most popular derivative instrument in the UK due to the tax free status is enjoys. When you agree to a Contract for Difference, you are required to pay the broker in question a fee and this will be taken in the form of a commission and/or spread.


Why is it popular?

There are a number of reasons why people choose to trade CFDs rather than purchasing ownership of financial assets:

Shorting. When you purchase a company share or any other financial asset, you are essentially betting on its price increasing in value. The problem is, if you think the price is going to go down, you cannot put money on this outcome happening. This is where CFDs come in. A Contract for Difference broker will allow you to take either side of the contract which allows you to bet on its value going up or down.

Leverage. When you trade CFDs you are likely to be doing so with leverage (margin). This means you can take out positions that are worth considerably more than the value of your bet which allows you to receive a much higher return if the market moves in your favour. Conversely, if your position turns out to be unsuccessful, you will end up losing at a higher factor.

Market choice. Large CFD providers tend to offer a vast selection of financial markets. You can take out positions on a whole host of company stock, commodities, energy prices, interest rates and much more.


Where can I trade CFDs?

There are an ever growing number of CFD brokers on the market and it is important to choose one that is competitive with its fees and financially secure. As we saw with the recent downfall of World Spreads, you do not want to trade with a company where you can end up losing your money. IG Markets is the largest derivatives provider and probably the best service provider too. If you are looking to sign up with a company, they might be worth a look.


This article was written by Greg Bassett, editor of the online trading guide www.blueIndex.co.uk. Check the site out today for a comparison of the top CFD brokers on the market.