Contract for difference (or CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the seller pays instead to the buyer.) In effect CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets. They were initially used by hedge funds and institutional traders to hedge their exposure to stocks on the London Stock Exchange in a cost-effective way. The CFD providers started to expand to overseas markets with CFDs being first introduced to Australia in July 2002 by IG Markets, a subsidiary of IG Group, and CMC Markets. CFDs have since been introduced into a number of other countries; see list above. The CFD is started by making an opening trade on a particular instrument with the CFD provider. This creates a ‘position’ in that instrument. There is no expiry date so the position is closed when a second reverse trade is done. At that point the difference between the opening trade and the closing trade is paid as profit or loss. The CFD provider may make a number of charges as part of the trading or the open position.
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