Definitions for "Contracts for Difference"
Keywords:  cfd, brent, settle, expiry, don
CFD’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 can’t take delivery of the index itself, so your profit (or loss) is the difference between the contract’s price when you buy it and the contract’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 you’re trading individual shares rather than a stock market index – and there’s no expiry date. You don’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 – 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.