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CONTRACTS FOR DIFFERENCE

Pardon? THESE are contracts between a buyer and a seller in which the seller agrees to pay the buyer the difference between the current value of an asset and its value at a certain point in the future. If the price of the asset goes down in value then the buyer pays the seller instead. The ‘asset’ in question can include anything from a commodity such as oil to a stock in a company.

What’s the point?

They allow traders to speculate on the movement of oil or share prices or any other asset without actually owning the actual asset. These instruments enable hedge funds, for example, to bet on a share price going down in value. They are also used by institutional investors and investment banks to ‘hedge’ their bets. For example, if they have gambled on a share price going up they may also want to ‘protect their position’ by selling a CFD on that asset.

Can I buy them?

Yes. They are widely available to retail investors, but they should only be used by sophisticated punters who know what they are doing and have enough spare cash to lose. Firms such as City Index and CMC Markets offer CFDs to retail investors.

Are they risky?

Yes, very. If you bet on prices going down you can lose more than your initial investment. CFD’s are at the centre of the speculative ‘casino’ banking culture that contributed to the financial crisis.