CFD's are a synthetic equity product, which mirror the economic benefits of being long or short an equity or commodity. Performance is settled daily and dividends and corporate actions are treated as cash payments.
Contracts for Difference are designed for short-term share trading and have significant advantages over normal dealing, most importantly the ability to trade on margin and the ability to go short. Contracts for Difference do not incur stamp duty.
Advantages of CFD trading over normal share dealing:
Instead of depositing 100% of the transaction value, the investor is only required to deposit margin as collateral.
Using CFDs allows the investor the ability to go short on a share - previously a costly and complicated procedure available only to significant and sophisticated investors. This allows the investor to take advantage of anticipated price declines in a share.
Reduced Transaction Costs
There are no other costs involved other than a low transaction commission - there is no Stamp Duty to pay, PTM levy or other local charges. Commissions are fixed and there is no storage fee.
Risk Management and Hedging
CFD's are particularly useful when employed in risk management and hedging strategies. For example, if an investor held a physical position but anticipated a short-term price decline, he would simply short the commodity via a CFD to realize a profit to offset any loss on the physical.