Word of The Day – CFDs

CDFs – Convenient Full-Service Derivatives

Definition: Contracts for Difference (CFDs) are popular derivatives in many other countries. The SEC has banned them in the US.

Discussion: Contracts for Difference “allow investors to speculate on price movements of stocks without owning the underlying assets.”

“Contracts for difference (aka CFDs) mirror the performance of a share or an index. A CFD is in essence an agreement between the buyer and seller to exchange the difference in the current value of a share, currency, commodity or index and its value at the end of the contract. If the difference is positive, the seller pays the buyer. If it is negative, the buyer is the one who loses money.” Source of above quotes

CFDs are one-stop shopping derivatives that make life “simpler for fund managers and wealthy retail buyers alike – CFDs “allow the buyer to hedge an existing exposure, leverage a position, or make an outright short [bet]”. Source: Article, “First central clearing for CFDs” in Financial Times FTfm section, May 9, 2011.

For a comparison of CFDs with options, futures, covered warrants, ETFs, FX (currency) products, and margin buying, see Wikipedia’s article on contract for difference.

Related terms: naked shorts; bucket shops

Copyright © 2011 Nancy K. Humphreys