CFD trading companies, also known as CFD providers, are brokerage firms dealing in a type of financial derivative called a CFD, or ‘contract for difference.’ CFD trading is a fairly recent development in the financial sector, first used in London in the early ’90s as a means for hedge funds to limit their exposure in stock positions held in the London Stock Market. Because trades are made using significant leverage, a relatively small amount of cash to cover the required margin could be used to control large amounts of the underlying stock equity, providing a cost-effective method of hedging a stock position. In addition, because there was no exchange of actual physical stock shares, the stamp duty tax imposed by the UK government was avoided.
In basic terms, contract for difference is just as the name implies. An agreement or contract is entered into by two parties, one a buyer and the other a seller. The contract stipulates that the seller will pay the buyer the difference in the value of the underlying asset from the time the contract is opened and closed. If the value has gone down between the opening and closing of the contract then the buyer must pay the seller the difference.
What Started as One Market Has Grown to Thousands
Though originally used primarily by hedge fund and institutional traders in one single market, the London Stock Exchange, word soon got out of the availability of this new high-leverage, low-margin trading opportunity and regular traders wanted in on the action. By the end of the decade many more investors were participating, at which point CFD trading companies expanded their contract offerings to include the bond market, other major stock markets besides London, commodities and foreign currencies.
CFD providers starting popping up left and right in England and, with the fast growth of the Internet, most became online CFD trading companies. GNI was the first to offer an online trading platform, soon to be followed by CMC Markets and IG Markets. The industry began a rapid growth phase as many more people learned that they could trade indices of the world stock markets with high leverage and low margin, and all without owning one single share of stock. Soon online CFD trading of the indexes of the Dow, NASDAQ and S&P 500 became extremely popular, even though CFD trading is illegal in the United States, being banned by the Securities and Exchange Commission. It is, however, available in:
- Australia, Canada, France, Germany
- Hong Kong, Ireland, Italy, Japan
- Netherlands, New Zealand, Norway, Poland
- Portugal, Singapore, South Africa, Spain
- Sweden, Switzerland and the UK