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Become a client    FAQ    Current rates

You probably know the acronym "CFDs", it stands for "Contracts for Difference".

As you can guess from the name, the interesting thing about CFDs is the fact that it's all about speculating on the price difference.

Until the late 1990s, trading in CFDs was largely reserved for institutional investors seeking to hedge against price volatility. But the high volatility of the new markets (new economy) brought the speculators on the floor. It was no longer necessary to invest a long time, but you could participate in short-term price jumps.

But how did the idea of ​​CFDs come about?

The beginnings of CFDs as we know them today are in the 1990s in the UK. Professional traders were looking for a cost-effective way to hedge against price fluctuations.
 
Most fund strategies were based on the fundamental idea of ​​rising markets. When the markets fell, the funds lost money, as it was not easy to speculate on falling markets at the time, as short selling was a costly and expensive business.


 
Suppose a fund manager was of the assumption that the price of a position in his portfolio would fall in value. In order to protect himself, he had to sell a position he does not own in order to secure his occupied position. In technical jargon one calls this procedure as short selling or shortening.

Therefore, he concluded a contract with his bank for the "securities lending" for the positions, which he can then sell on the market. At a later, contractually agreed time, the Fund must return the loaned securities back to its bank, ie it must repurchase the number of borrowed positions in the market. So, if the fund can buy back at a price lower than the original sell price, it will make a profit.
 
Thus, the idea a kind of standardized bet between bank and bank customers on the difference in price of a financial title was concluded. In order for bank customers to be able to settle their betting debts if the deal went against him, the bank wanted a guarantee. However, this was much lower than the capital required to directly buy or sell the shares or foreign exchange.

The idea of CFDs was born!

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