Picture London of the roaring 90s. A real estate firm – Trafalgar House – is being threatened with bankruptcy. Their Hong Kong, associates, Jardin Matheson, decide to come to the rescue; but they don’t want to be saddled with Trafalgar’s depts and they CERTAINLY don’t want to pay taxes on buying an ailing firm.

Enter Brian Keelan and Jon Woods – two brokers who created a special contract that meant that Matheson didn’t have to buy Trafalgar outright. Instead, the two companies would exchange cash flows at a fraction of the actual cost. Add to that that they didn’t need to pay taxes on any exchange of shares.

By the end of the decade, CFDs were quickly adopted by hedge funds ; and by the end of the MILLENNIUM, they were being grabbed up by the first generation of online retail traders.

Today, CFDs reign in the online environment because 1: they’re leveraged, meaning you only have to invest a small portion of the trade size; 2: they’re easy to understand; 3: they don’t have a date of expiration or a strike price. You simply compute the difference between the price when the contract was opened and when it’s closed. And 4: since a CFD is a derivative, you can go long or short, meaning you can invest in the rising OR falling value of the underlying asset.

When you open a CFD trade you’ll normally be dealing with your broker as the COUNTERPARTY. That means that you don’t need to wait for a someone who wants to buy or sell the underlying asset before you can execute your trade.