Contracts for Difference and CFD Trading

Contracts for difference provide an excellent vehicle for short term trading strategies and are the preferred vehicle amongst hedge funds and professional traders. Trading the UK stock market through more traditional means is both cost prohibitive and cumbersome. Financial spread betting enjoys a higher growth rate, and acts as an effective entry level product, allowing the individual a lower level of financial commitment. However, ultimately the more professional player will be unwilling to trade indefinitely on someone else's prices. Current estimates of CFD activity suggest that upwards of 25% of Stock Exchange transactions are CFD related.

You should be aware, there are two different types of contracts for difference providers, one is more like a traditional spread better where you are trading with the CFD provider and have to trade on their prices. With the other provider, your contracts for difference orders or more strictly the hedge for your CFD orders is sent directly to the LSE order book. With the second provider you can send a limit order to buy on the bid / sell on the ask and avoid paying the spread if someone should decide to hit your bid / lift your offer. The first type of provider is more prevalent and will normally charge a lower commission, but you still have to deal with the normal spread betting bias issues there. "Proper" CFD providers like ETrade typically charge more in commission.

With the spread betting type CFD the prices you trade on as the providers, with the direct CFD you are dealing on live prices from the market. It is important to understand the distinction.