A Contract For Difference (or CFD) is a contract between to parties, typically described as "buyer" and "seller". Stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at the time the contract is sold. (if the difference is negative, then the buyer pays instead of the seller). For example, when applied to Equities, such a contract is an equity derivative that allows investors to speculate on share price movements, without the need for ownership of the underlying shares.

Contracts For Difference allow investors to take long or short positions, and unlike futures contracts have no fixed expiry date, standardised contract or contract size. Trades are conducted on a leveraged basis with margins typically ranging from 10% to 30% of the notional value for CFD's on equities.

CFDs were originally developed in the early 1990s in London. They were initially used by hedge funds and institutional investors to hedge their exposure to stocks on the London Stock Exchange in a cost-effective way.

The CFD providers started to expand to overseas markets with CFDs being first introduced to Australia in July 2002. Up until this point CFDs had always been traded 'Over the Counter'
(OTC). However, on 5 November 2007 the Australian Securities Exchange (ASX) listed exchange-traded CFDs on the top 50 Australian stocks, 8 Foriegn Exchange (FX) pairs, key Global Indicies and some Commodities.

CFDs have previously received a bit of a bad name amongst investors as being too risky, but this is an un-warranted label. If used intelligently CFDs can allow the average investor greater utilisation of sometimes limited funds, whilst offering no more risk than a normal Equity position. Of course, if managed incorrectly, CFDs (as with any ill-managed investment tool) can be quite detrimental to a traders capital.

Principal House aims to remove the myths about CFDs and show its clients the true power of utilizing the CFD as it was designed. Many clients with smaller initial capital are able to successfully trade CFDs and make profits over and above that which they could otherwise. As with anything, a little knowledge can go a long way. Once they have been introduced to CFDs, and taught to manage them correctly, many Equity traders never look back.