A contract for difference (or CFD) is an equity derivative that allows users to speculate on talk about price over-the-counter actions, with no need for ownership of the fundamental stocks. CFDs are traded (OTC). In fund, an agreement for difference (CFD) is an agreement between two parties, typically referred to as “buyer” and “seller”, stipulating that owner can pay to the customer the difference between your current value of a secured asset and its own value at agreement time (If the difference is negative, then your buyer will pay instead to owner). The word “Contract for Difference” means that the merchandise is a cash-settled product. There is absolutely no receipt or delivery of the underlying instrument, like a share certificate. The consequence of the trade is the money difference between your bought and sold price.
Background of CFD’s
Originating in Futures and Options, CFDs were originally developed in the first 1990’s by the derivative table of Smith New Courtroom – a London-centered brokerage trading company that was later purchased by Merrill Lynch in 1995, in an offer worth £526 million. The innovation is certified to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg.
CFDs first surfaced in the over-the-counter (OTC) or equity SWAP markets which were used by institutions to cost-effectively hedge their equity exposure by utilizing certain risk-reducing and market neutral trading strategies. Initially, CFD trading represented a cost-effective way for Smith New Court’s hedge fund clients to easily sell short in the market (the London Stock Exchange) with the benefit of leverage and to benefit from stamp duty exemptions that were not available to outright share transactions. In particular, by using CFDs, institutional investors and hedge money no longer had a need to physically negotiate their equity/talk about transactions which used intended that such agreements didn’t require delivery or approval of the root instrument. In this manner, these large clients were also in a position to prevent the cumbersome and sometimes costly procedure for borrowing stock when they wished to sell short.
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