Contracts for difference
Entering into a contract for difference, or CFD, involves making a bet on the movement of share prices...
Entering into a contract for difference, or CFD, involves making a bet on the movement of share prices. It works in much the same way as buying and selling shares except that there is no actual share transfer (and hence no stamp duty).
The contract itself is an agreement between two parties to exchange, at the close of the contract, the difference between the opening and closing price of a share, multiplied by the number of shares the contract specifies.
A 'long' CFD gives the holder all the benefits of a rise in the share price, but no rights to acquire the underlying share, and no shareholder rights. A 'short' CFD gives the holder the benefits of a fall in the share price, without the need to deliver the underlying shares.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
On entering the CFD you deposit a percentage, say 20%, of the contract value (share price multiplied by number of shares). In this way, CFDs are used to gain leverage of up to five times exposure: a £20,000 CFD will bring the same returns as £100,000 worth of stock.
But there is also a downside. If the share price tumbles when you expect a gain, you can end up losing more than your original investment.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Review: Eden Roc Cap Cana – fun, sun and golf in the Caribbean
Travel Eden Roc Cap Cana in the Dominican Republic offers everything from relaxing by the pool to a world-class golf course
-
Reeves delays cash ISA reform, but savers are not out of the woods yet
The chancellor has reportedly delayed plans to cut the cash ISA limit, which were set to be announced at Mansion House on 15 July, and will take more time to consult with the industry