Contracts for difference Definition
Contracts for difference (CFDs) is a speculative tool offered by various companies to the experienced speculator.
The underlying principle in contracts for difference is that the investor does not have any claim to the underlying asset but merely takes a position based on the price movement. CFDs are always traded on margin; additionally, the margin is usually small enough to allow a large exposure with small amounts of cash, not unlike the futures market. Nowadays, CFDs can be found for many different financial instruments from shares to commodities to exchange rate swaps.
Because margin requirements tend to be low, gains and losses from small movements in the price of the underlying asset are magnified.
CFDs can also be used for hedging a position in the underlying asset by taking an opposite position in the CFD market.