| CFDs are 'contacts for difference', and were originally | | | | This has a remarkable effect on the potential to turn |
| developed on the London Stock Exchange in the | | | | fluctuations in the stock market into real profits |
| early 1990s. They were introduced initially to hedge | | | | without having to actually purchase the stock which |
| funds and institutional investors so as to decrease | | | | is the underlying security for the contract. As CFDs |
| their exposure to share price movements. They | | | | are leveraged instruments, it is natural that there is |
| proved so popular that they were introduced to retail | | | | some inherent risk associated with purchasing such |
| investors in the late 1990s on the London Stock | | | | contracts. However CFDs allow you to limit that risk |
| Exchange. Since then, a number of countries have | | | | to a level you deem acceptable. As part of the |
| introduced the concept on their stock exchanges, the | | | | contract you can stipulate a specific share price you |
| notable exception being the United States. | | | | wish to sell at for either a loss or a profit. |
| The whole concept of CFDs is similar to options, in | | | | For example, if I purchase a CFD on XYZ company |
| that they are a leveraged instrument. In short, that | | | | which is currently trading at $10.00. I stipulate that if |
| means that the owner of a CFD is exposed to price | | | | the stock drops to $9.50 I want to sell and limit my |
| movements of the underlying instrument without | | | | losses. I believe that the stock will actually rise, so |
| having to actually own the underlying instrument. This | | | | set a further limit of $11.00 at which point I want to |
| has advantages in speculating over short term price | | | | sell. In effect I have set acceptable limits of losses |
| differentials and fluctuations. Options are similar in that | | | | and profits, defining my risk margin. I urge you to |
| regard, however it is noteable that there is no time | | | | seek more information on CFDs and stock market |
| decay with CFDs as the contract does not have a | | | | trading, educate yourself in this remarkable |
| time factor - the contract remains in place until one | | | | investment opportunity. |
| position or another is exercised. | | | | |