What is the point of CFDs?

[Mark R]

Just testing out a new CFD account.

As far as I can tell, I might as well just be trading the underlying instrument rather than the CFD - so what is actually the difference?

As an aside, I suck at day trading - good thing my broker lets you trade with monopoly money

 

[Fenixgoon]

i read CFD as "computational fluid dynamics"

 

[glenn1]

Originally posted by: Fenixgoon
i read CFD as "computational fluid dynamics"

I work in the brokerage industry and I had no idea what CFDs were either.

 

[mh47g]

I read it as CFO.

 

[Mark R]

Discovered that it appears to be some sort of tax avoidance technique.

In some jurisdictions (e.g. Europe) sales tax must be paid when stock is purchased, and that tax is not recoverable when the stock is sold. This drastically reduces the profitability of active trading, and encourages long term investment.

Because in a CFD transaction, only the difference in price on the share (and appropriate dividends/financing) are exchanged, there is no sales tax as the contract itself has no value. This allows holders to stock to 'short' CFDs in the stock, if they want to temporarily hedge the market.

And, because no money changes hands up front, CFD transactions are amenable to margin trading - and this is how they are generally marketed by the brokers.