CFDâ€™s allow you to take positions on share prices without needing to buy and sell shares themselves. How? Think of a futures contract on a stock market index. The contract price is based on the value of the index. You canâ€™t take delivery of the index itself, so your profit (or loss) is the difference between the contractâ€™s price when you buy it and the contractâ€™s price when you sell it. In this sense a futures contract on a stock market index is a contract for differences; the difference between the opening and closing price of the contract at expiry. A CFD works in the same way, except that youâ€™re trading individual shares rather than a stock market index â€“ and thereâ€™s no expiry date. You donâ€™t buy the share, you buy a contract which reflects its market price. Then, just like a futures contract on an index, when you close out, your profit (or loss) comes from the difference between the opening and closing share prices â€“ hence, "contracts for differences". In this sense a CFD is a bit like an off-exchange futures contract.
CFD means Contract for Difference. They were developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock. In other words you cannot take delivery of a CFD so you have to settle the difference between where you bought the contract and where you sold it. The difference is either profit or loss.
CFDs are a form of bet in which the purchaser gets all the gains of share ownership without actually owning the stock. If you buy a CFD you pay interest on the notional money required to buy the amount of stock involved, but are credited with any dividends. The reverse applies if you sell a CFD (go short). CFDs are a form of margin trading, since typically a buyer will only have to put up 10-20 per cent of the actual value of a position. Price spreads are normally lower than in spread betting.
Contracts For Differences (CFDs) are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a the underlying security without ownership of the underlying security. A CFD Provider will quote a "buy" and a "sell" price for a CFD, based on the underlying price and the contract is cash settled; if the investor makes a 'gain', the provider will pay the amount of the gain to the investor and if the investor makes a 'loss', the investor will pay the amount of the loss to the provider.
This term is used as an alternative to the term swap. The term is often applied to hedging instruments used in the UK electricity market, and in the Brent 'CFD' market. (Source: Risk Publications) swaps