What is a Contract for Difference (CFD)?
Published 09/02/2014 | 02:30
* A Contract for Difference is a financial investment or gamble whose value is based on the future price change of an asset.
* The price change is called 'difference'; a contract is signed between a 'buyer' and a 'seller', hence the name Contracts for Difference.
* The asset could be anything from currencies, to bonds to oranges.
* At the time of purchase the investor only pays a small percentage of the asset's actual price
* The investor gambles on the future price of the asset; if its price goes up the investor gains and if price goes down they lose.
* The investment is made indirectly through a CFD provider
* While the investor has gambled on the asset at no point do they own it.
* Advantages to their purchase include not paying stamp duty on the CFD and not having to disclose your shareholding to the market (rules changed in 2010 and now CFDs must be disclosed).
* University College Cork economics lecturer Seamus Coffey told the Anglo trial that the difference between shares and derivatives (like CFDs) was similar to the difference between having a share in the ownership on a horse and placing a bet on it.
* Economists accept there is no clear definition for a CFD.
* CFDs are not permitted in the US, but similar financial instruments do exist there.