Contract for difference (CFD)

Quick definition

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Updated: Jan 20, 2023

A CFD, or contract for difference, is a trading tool that lets you speculate on the prices of financial assets without owning them.

Key details

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  • The price of a CFD tracks that of a particular asset and you can buy or sell it to predict how that asset will perform in the future
  • CFDs are always settled in cash, so you don’t ever have to take possession of any goods or financial securities
  • You can trade CFDs at any time of day, and they aren’t restricted to regular market trading hours

What is a CFD?

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It’s a contract that represents the price of an underlying asset. That asset can be a specific stock, commodity, cryptocurrency, currency pair, or an index, and you can buy or sell a CFD to speculate on how the price is going to change without ever having to own the asset itself.

The fact you don’t ever own anything is the defining feature of a CFD. The money you make is based on the change in price between the time you buy a CFD versus when you sell it (or vice-versa), and you don’t have to worry about taking possession of any goods or securities.

Many people use CFDs because they are cheaper and have fewer limitations than other forms of investing. CFD trading is usually free and available at any hour of the day, unlike buying individual stocks on the stock market, which can cost a flat fee or commission and only takes place during normal trading hours.

How do CFDs work?

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By mimicking the price of the asset that they represent. A CFD that represents a share in Apple, for example, would rise and fall in value just as Apple’s stock price does. But it’s simply a means of speculation: if you buy one you wouldn’t take ownership of any stock.

As CFDs aren’t transactions where you exchange money for a good, they are much more flexible trading tools. It’s possible to sell a CFD (known as ‘shorting’) if you think the price is likely to fall, and you can use leverage in order to buy assets you wouldn’t otherwise be able to afford.

For that reason, CFDs are popular with people who have an active trading style, such as day-traders. They often study price charts in order to identify patterns and trends, then use leveraged CFDs to try to take advantage of small changes in price over a very short time frame.

What’s the difference between trading a CFD and spread betting?

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The main difference is that CFDs are subject to tax and spread betting isn’t. This can work as both a positive and a negative, as it means you have to pay tax on any profits you make when trading CFDs but any losses are tax-deductible.

In practice, the tax rules only apply to people who trade a significant amount. In the UK, you only have to pay a capital gains tax on any money you make above a personal allowance of £12,600.

Where can I learn more?

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For more information about CFDs, and other key financial concepts, take a look at the stock market courses we offer. To learn more about investing in a particular asset, our stocks, forex, and commodities hubs can help you.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.