Contract For Differences

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A futures contract that is settled in cash. That is, the underlying does not trade hands, and neither party needs to own it. Two parties simply designate each other as seller and buyer, and at the close of the contract one party pays the other the difference in value between the underlying's opening and closing prices, multiplied by the number of shares specified in the contract. If the difference is positive, the seller pays the buyer; if the difference is negative, the buyer pays the seller. An advantage to CFDs is the fact that they are exempt from taxes like stamp duties, because the underlying asset does not actually exist. However, they tend to work better as short-term investments because they are subject to daily financing charges.

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