Many people have invested in contract for difference (CFD) without fully understanding the product. Now that MF Global, a major counterparty to many CFD platforms have collapsed, people finally wake up and understand there is such a risk known as counterparty risk. While I do not advocate investing in CFDs, I believe all investors should have an understanding of how CFD works. CFDs are available in many countries throughout the world with the exception of United States.

What is Contract For Difference (CFD) exactly?

Contract for difference (CFD) is a financial derivative, a contract between two parties, stipulating that the buyer (retail investor) will have to pay the seller (counterparty i.e. MF Global) the difference in current price of an underlying asset and price at contract time. So if the stock price rises, CFD seller pays the buyer; if the stock price drops, CFD buyer has to pay the ...