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A Contract for Difference, or CFD is an two way trading deal between two different parties based on the rise or fall in the trading price of an agreed number of shares in a company over an agreed time - no actual share purchase is necessary. Although it does sound rather complicated it is not too bad at all.. Major hedge funds have been making use of CFD Trading in the UK stock market for just over ten years instead of regular stock market trading. CFD trading is similar in many ways to spread betting in that both are margined products so you can gear yourself up or take a position that is a multiple of your available funds.

For example, if the margin on a firm youre interested in was 10%, establishing a position of £100,000 would really only require a deposit of £10,000. Any running profits you make can be used as margin to establish new positions but any running losses would have to be made good by reducing your position or providing additional funds.

While the stamp duty of 0.5% on all UK share purchases has in the opinion of some traders reduced the cost effectiveness of ‘day-trading’ traditional stocks and shares, both CFDs and spread betting are exempt and this has added to their appeal. CFDs are liable to capital gains tax whereas spread bets are tax free, but losses incurred from spread bets are gone for good while CFD losses can be offset against any future profits for the purpose of tax. When you trade in CFDs, you purchase those contracts in almost the same way that youd buy shares. So if you wanted exposure to 1,000 shares in a company, youd have to sell 1,000 contracts at, say, 494p per contract rather than simply placing a £10 per point bet with spread betting to get a similar return.

Most CFD providers admit you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. With CFD you are the price maker, which is why hedge funds incline to use CFDs rather than spread betting. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions individually. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. Because of this, the CFD spread quote will always be very close to the underlying price of the share or commodity that you are following. CFDs also mimic nearly every aspect of owning the underlying share or market, so if you hold a position for a long enough time period you will recieve the benefit from any dividends being paid on the shares.

CFDs and spread betting have particular features that will appeal to different trading styles and there is no one best instrument to use. However they should not be regarded as substitutes for long term investment or saving, as more people seek to take control of their financial destiny, theres been a growing realisation that going short is a legitimate means of trading in market thats become progressively difficult to profit from in a traditional sense.