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.
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.