A contract for differences is an investment vehicle that allows investors to make very speculative guesses about the stock, options, and currency markets. Essentially, a CFD is a futures contract that allows the parties to settle in cash rather than actual delivery of a stock or good. By allowing the contract to be settled with a cash payment, you don't have to actually own the underlying security.
Individual retail investors have only had access to trading CFDs for the last few years. The trading instruments have been used for more than two decades in the professional investment community, however. There are four main reasons why an investor would trade contracts for differences--to make long and short speculative bets, to hedge against a portfolio position, to lock in profits, and to free up cash from a portfolio by using leverage.Since CFDs can be bet long or short, you can make money from the contracts in both up and down markets. Shorting a position can also hedge against a current position you might hold in your portfolio already. Since CFDs can be traded with leverage, using these contracts to make risky investments can dramatically enhance your returns if you're right! If you're a novice investor, you'll want to seek professional help before trading CFDs.There are several different strategies for trading CFDs. In general, trading CFD contracts are very risky and should be reserved for investors who have play money and a high risk tolerance. U.S. investors are exposed to even more risk when trading CFDs because the financial instruments are not regulated by the Securities and Exchange Commission. CFDs are instead regulated by the Financial Services Authority in the United Kingdom.
