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Contract for difference

Contracts for difference (CFDs) are financial instruments (derivatives) that offer exposure to the stockmarkets at a small percentage of the cost of owning the actual share. This allows the investor to buy or sell a CFD, which usually costs only 10 per cent of the price of the underlying share. The owner of a share CFD will receive cash dividends and participate in stock splits.

With a CFD, the profit/loss is determined by the difference between the buy and the sell price.

CFDs are not suitable for “buy and hold” trading or long-term positions. Each day you maintain the position it costs money (if you are long), so there is a time when CFDs become expensive. For short-term trading they have advantages, provided you get the markets right. But be prepared at some economic stage to cut the position.

The profits from CFDs after deducting any losses are subject to capital gains tax (CGT) if your annual CGT allowance is exceeded.

As with any derivative CFDs are high risk investments calling for a greater degree of knowledge than other forms of investment. Information is available online from firms who offer CFDs, but we are not aware of any source of independent information (if you know of one, please tell us: ). We provide the following links to help you obtain further information but do not endorse either the firms concerned or the products they offer:

Hargreaves Lansdown guide to CFDs

Insinger de Beaufort CFD guide (in pdf)

The Investor's Toolbox by Peter Temple includes a section on CFDs.

 

 

  9 October, 2008 © 2008 K.R.Wade and Co Ltd prev page next page