Author: Jacob Bailey
Market Analyst
Jacob Bailey

The History of CFD Trading

CFDs were initially developed to fill a niche gap in the trading market and to attract a particular type of investor. Because no actual products or assets are purchased, traders know a relatively simple way of enjoying tax-free trading without long term commitment.

While CFDs may not have been around as long as other forms of traditional trading, they have come a long way in a tight space of time, moving rapidly from being a commercial finance tool, to become firmly entrenched in the retail investment arena.

As with most forms of trading, it is essential for you to learn a bit about the history of this particular derivative to see its potential as part of a diverse trading portfolio.

In this guide, you will learn:

  • How CFD trading first got started
  • Why CFDs are a popular choice
  • The future for retail CFD trading

How Did CFDs Begin

The very first CFD (Contract For Difference) dates back to the early 90s. At this point, CFDs were very much the realm of corporate trading firms and hedge funds, which used them as a way to facilitate leveraged shorting.

From that point, CFDs continued for several years as an over the counter (OTC) product, remaining as the province of banks and the bigger finance houses, mostly out of reach to the majority of traders due to the sheer level of investment required.

It was over a decade later that the CFD market opened up to public trading via an exchange. The first was the Australian Securities Exchange which offered CFD options on a minimal number of commodities, shares, indices and Forex pairs.

The very first CFD (Contract For Difference) dates back to the early 90s.

When CFDs Became Popular

CFD History

Although CFDs were becoming more available to the smaller investor, it was around 2007 when the majority of retail traders became much more aware of this particular investment option, and the growth of CFDs went above 100% in that year alone.

Along with trader interest, the number of CFD offerings increased to embrace many of the famous stock exchanges and indexes. With considerable industry growth still apparent, inevitably came formal legislation and in late 2017 CFDs were put under further scrutiny, with much stricter rules surrounding their advertising and usage, which included leverage limits and negative balance protection.

At one stage, mainly due to lack of a regulatory body, CFDs were plagued by concerns regarding insider trading. However, even this controversy did not dampen enthusiasm or continued uptake of trade in the product.

The Story Today With CFDs

Today CFDs are one of the most-advertised forms of retail trading, and you will no doubt have seen numerous pop-ups and sponsored posts in your news, and social media feeds.

The accessibility to these products has increased tenfold in the last decade, and they can offer you the chance to be involved in all significant financial products from around the world.

Because CFDs do not involve the purchase or sale of the shares themselves, they do not attract Stamp Duty, and this is one of their attractions to investors. However, it may access to leveraged trading that has drawn you to this particular derivative.

Effectively, leverage also makes CFDs very attractive to commercial investment managers and has resulted in the widespread popularity of CFDs as a trading instrument, with hundreds of thousands of trades taking place daily.

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CFD Trading in The Future

As with all popular retail trading tools, technology has and will continue, to play a big part in the growth rate of CFDs. Almost universal Internet access, fast and reliable connections, plus the ability to synchronise trading platforms from mobile devices, can only equal even more participation in the future.

The finesse of CFD platforms and increasingly intricate methods of market analysis appear to be leading to more short term (intraday) trading positions being taken up than long term, a trend that some experts are predicting will continue.

Others suggest that the unpredictability of the global economy will open the door to a flood of very astute traders who will be using CFDs purely as hedging and swing trading instruments.

Maybe it will only be those traders who can set their personal trading preferences aside and pay full attention to implementing a good mix of both tactics and strategy will be the winners in the future.

Meet The Author
Jacob Bailey
Jacob Bailey
Market Analyst
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Jacob has been an author for us since our launch in 2012. He has over forty years’ experience in the financial sector and has held a variety of positions within financial services corporations and venture capitalist organisations. Learn more.

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