Explaining CFDs, part 2

The last time, we had a basic outline of what Contracts for difference (CFDs) are. This time around, we want to give a bit of a background to where CFDs came from. This will hopefully give more context as to why they are so popular.

The history of CFD use

As we mentioned last time, CFDs are more popular in Europe. This is partly because that’s where they originate from. Specifically, they have origins in London. This was in the 90s, from UBS Warburg and Trafalgar House.

They originally started off in hedge funds. The margin that people had to pay on these derivatives was small, so they seemed like a great, worthwhile investment.

They eventually made their way to retail traders as the 90s progressed. They also arose as the internet was becoming immensely popular. Since these sorts of derivatives were so accessible, the rise of the internet only boosted their popularity. People could look into basically any financial market and use CFDs to help them benefit from them. However, they were also highly unregulated, as with many such derivatives. This is why the USA did not allow people to trade in such derivatives.

They grew all over the world, and are now even in Australia.

Over time, people in these markets have moved increasingly further from traditional trading methods. This includes using hedge fund managers to help deal with their investments. These sorts of trades had become too slow on profits. They were only really useful for keeping up with inflation.

With CFDs, that use is a lot easier to get around. People can possibly make far greater profits than they would otherwise. However, as we said though, the market is unregulated. This means that the losses one can make are far higher. This is especially true when trading with leverage.

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