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What is a Listed CFD?

John Lister
John Lister

A CFD, or contract for difference, is an investment agreement in which two parties agree at the time of investment that one will make a payment on a future date. The payment is to be equal to the value of the difference between the current market price of an asset and the market price on the future date. Which party pays the other depends on which of the two prices is larger. A listed CFD is one that is carried out through a financial exchange rather than being a purely private agreement.

Many forms of CFD are over-the-counter or OTC agreements, which means they are made directly between the two parties. Often, an OTC agreement is not regulated by the relevant government and financial system. A listed CFD is one where a financial exchange administers and regulates the agreement between the two parties. As of 2010, only the Australian Securities Exchange and the London Stock Exchange offered listed CFDs. In the London case, the way the contracts are viewed in British law means they are effectively tax-free investments. This gives them a tax advantage even over the otherwise-similar activity of spread betting.

Businessman with a briefcase
Businessman with a briefcase

Some countries do not allow for CFDs to be traded in any form. In the United States, there are no exchanges offering a listed CFD. This means there are no legal CFDs in the US at all, as the Securities and Exchange Commission has restrictions on over-the-counter financial instruments that ban OTC CFDs.

A listed CFD offers some specific advantages over an over-the-counter CFD. Because they are listed on a stock exchange, traders do not need to set up a specialist account. Another benefit is that the prices used in deals are negotiated through the stock exchange, rather than directly between the trader and the CFD provider. This brings more elements of competition, and reduces the likelihood of a trader unwittingly being led into a particularly unfavorably priced deal.

In the case of the London Stock Exchange, there are no margin calls for listed CFDs. A margin call is where the trader will have to pay some money if his position, and thus his potential losses, worsens before the contract concludes. This is designed as a form of insurance for the other party in the agreement to limit the likelihood of the trader being unable to pay up when the contract concludes. With the LSE, the trader simply pays between 5 and 15% of the total value of the deal up front.

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