What are CFDs? CFDs or contract for difference is a two-party contract involving a seller and a buyer that stipulates that the seller will pay the buyer the difference in value of an asset during the time the contract was made and its value at present time, hence the name. If the difference of the CFD is negative or the value of the asset has dropped since the contract was made, then it’s the buyer himself who’ll be paying the seller for the difference. Essentially, CFDs are financial derivatives that enable traders to benefit from falling prices (short positions) or rising prices (long positions) on fundamental economic tools that are often used to make speculations on those particular markets.
More to the point, when CFD is applied to equities, it serves as an equity derivative that enables traders to speculate on the movements of share prices without needing to own the underlying shares themselves. These contracts are presently available in Spain, Japan, Ireland, France, Norway, Sweden, New Zealand, Canada, South Africa, Singapore, Italy, Switzerland, Germany, Portugal, Poland, the Netherlands, Hong Kong, and the United Kingdom. In the United States, CFDs are not permitted because of the restrictions and regulations spearheaded by the SEC (U.S. Securities and Exchange Commission) regarding financial instruments deemed as “over-the-counter” or OTC.
CFDs originated in London during the early nineties as a kind of equity swap that was exchanged on margin. The men credited for the creation of the CFD are Jon Wood and Brian Keelan… both from UBS Warburg… on their early nineties deal for their Trafalgar House. Furthermore, CFDs were initially utilized by institutional and hedge funds traders for the sake of hedging their exposure to London Stock Exchange stocks in an affordable manner that adds more value to their investment. No physical shares changed hands because CFDs avoided the UK stamp duty tax and needed only a small margin. During the late nineties, retail traders were first introduced to CFDs; they became popular among UK companies, and their benefits were exemplified by cutting-edge trading platforms that made it trouble-free and uncomplicated to view live prices and trade in real time.
The first company to take advantage of CFDs this way was Gerrard & National Intercommodities (GNI); the corporation and its trading service made exclusively for CFDs… GNI Touch… were later acquisitioned by MF Global. They were then followed by CMC and IG Markets that began to popularize the CFD product during the turn of the millennium.