Contracts for Difference, or CFD's as they are more popularly known, are a financial markets trading tool which allows investors to gain access to investments in individual shares, equity indices, bonds, currencies, commodities and many other tradable securities.

The product has seen explosive growth in recent years, with the flexibility and risk management benefits appealing to novice and sophisticated investors and traders.

A CFD is a contract with an authorised and regulated dealer to exchange the difference between the opening value and the closing value of a trading instrument, multiplied by the number of CFD's in the contract.

The contract mirrors the performance of the underlying instrument, offering all the benefits of trading the underlying instrument without having to physically own it. With CFD's you can buy if you think the price of a financial instrument will rise and you can sell if you think the price will drop. Therefore it is also possible to profit from a fall in the price of the underlying instrument.

Benefits

Leverage
CFD's give the small investor leverage, or greater exposure for less outlay. Effectively, we put up only a portion of the overall "face value" of the investment, but get the benefit of the overall position.

Ability to go long or short
Markets go down as well as up. With CFD's you can potentially profit from falling markets as you can sell an instrument as easily as buying it this is known as 'going short'

Access to Global Markets
CFD's allow you to trade on a whole host of global instruments. Most CFD platforms allow the ability to trade on Shares, Indices, Commodities, Sectors and Treasuries 24 hours a day.

No Stamp Duty (UK shares only)
Unlike traditional share dealing CFD's incur no stamp duty on dealing in UK shares.

Characteristics

Margin requirements
CFD products are traded on margin. Margin is an efficient way to use your capital as instead of paying the full value of your position you are only required to pay a percentage deposit.

This size of this 'deposit' is dependant upon the instrument you are trading and ranges from 1% - 10% of your total position value. However, losses will also be magnified so margin trading is not necessarily for everyone.

Financing requirements
When you trade using margin, the CFD broker is effectively loaning you money to cover the cost of your trading position.

Therefore you are charged interest to cover the position for each night it is open. Financing is charged against the total value of your position.

Tax Treatment
Individuals may be subject to either capital gains tax or income tax on gains or losses arising from CFD's. Independent professional advice should be taken based on your own facts and circumstances.