The worldwide demand for trading contracts for difference has shot up in recent times, particularly with the high profile expansion of consumer markets in the US and Asia. Relatively simple to trade, and with potentially high gains on the upside, contracts for difference present a popular derivative for consumer traders and larger investment houses alike. But what is it about contracts for difference that make them so popular amongst traders?

Contracts for difference are pretty straightforward – essentially, its just an agreement between buyer and seller to exchange instruments at a set date, with the price payable to difference between the quoted bid/sell price when the contract is instigate. Much like spread betting, it’s trading on the marginal outcome – will the price of commodity X rise beyond Y, or will it fall below Z (where Y-Z= the broker’s spread).

Furthermore, with the added benefits of leverage, it’s possible to really kick some energy into your trading returns, and contracts for difference can be a great way to draw on the full benefits of leverage. Crucially, contracts for difference now account for around 30% of all London Stock Exchange transactions, as the preferred derivative of choice for many investors of all shapes and sizes.

Understanding the rise of CFD trading requires an understanding of the product itself: because of its flexibility, the fractional cost compared to trading underlying assets and the in-built leveraged mechanism, CFDs look set to remain one of the most popular trading instruments around.

About the author

Lunch is for Wimps used to trade currencies and equity indices – and even occasionally traded German government bonds when he was trying to cure insomnia. Watching Wall Street one night, he heard Gordon Gekko deliver the classic line: “if you want a friend, get a dog”. Unfortunately, a large build-up of ear wax led to him mishearing this piece of wisdom, and he ended up starting this damn blog when he should have been at the pet shop instead.

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