CFD stands for Contract for differences. This type of investment, known as CFD trading, is rapidly growing all around the world. The basic idea behind this concept is trading a share or asset without actually owning it. A contract is signed between a buyer and seller which states that the difference between the value of the share or asset at the end of the contract period and before the contract will be paid to one of the parties. The seller pays if it is positive and the buyer pays if it is negative. This kind of trading is based on speculation and not allowed in many countries like the USA.
This idea originated in London during the early period of the 1990s. This kind of trading is also not subject to a UK tax known as the stamp duty. There are also risks involved in this type of trading. Like all other stock trading this is subject to market risk. The other risks involved are counterparty risk and liquidation risk. This kind of trading has been under criticism because the many of the CFD providers who only show potential clients the amount of potential profit that can be made without accurately defining the risks involved. Since this kind of trading is based on speculation, many also feel that this is similar to a form of betting or gambling. Another concern is that there is little transparency in the process. This has led to the belief that some companies providing such services can very easily exploit their clients. The psychological factor involved is this kind of trading is very rarely explained to the client and in some cases is only apparent to the trader upon opening of a live trading account.