What is a Contract for Difference?

A contract for difference is a type of investment in which an individual can speculate on the movement in value of a security without actually owning it. This type of investment is often referred to as a CFD in most cases. This is a type of financial derivative contract.

With a contract for difference, 2 parties enter into a contract with each taking an opposite position on a particular financial asset. These 2 parties are referred to as the buyer and seller in the transaction. With this type of transaction, the seller agrees to pay the buyer a certain amount of money based on the difference in value of an underlying asset at the beginning and the end of a contract. If the value is negative, then the buyer has to pay the seller that amount of money.

Contracts for difference are not allowed in the United States because of SEC restrictions on over-the-counter securities. Many other countries such as the United Kingdom, Switzerland, Australia, Spain and Japan do have access to contracts for difference.

Many people prefer this type of investment because they do not actually have to take ownership of a financial security in order to benefit from price movements.

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