A contract for difference, also commonly known as a CFD, is an equity derivative that allows users to speculate on share price movements, without the need for ownership of the underlying shares. CFDs are traded over-the-counter (OTC).

Contracts for differences allow investors to take long or short positions and unlike futures contracts they have no fixed expiry date or contract size. Trades are conducted on a margined basis with margins typically starting at ten percent for CFDs on leading equities.

The contracts are subject to a daily financing charge, usually applied at a previously agreed rate above or below LIBOR or other Interest Rate benchmark. Users pay to finance long positions and receive funding on short positions in lieu of deferring sale proceeds. The contracts are settled for the cash differential between the price of the opening and closing trades.

The product was originally devised by the derivative desk of Smith New Court - an independent but hugely successful London based trading house - in the early 1990s. The advantage of CFDs was that they allowed the firm's large hedge-fund clients to be able to easily short the market whilst being able to benefit from effective leverage as well as the same stamp duty exemptions enjoyed by members of the London Stock Exchange.