Contract for Difference

Contract for Difference - The contract for difference is also known as CFD. A contract for difference is a legally binding contract that takes place between two persons, which mirrors the trading of a security situation, but doesn't actually involve the buying or selling of the security. These two individuals, the buy and the seller, sign a contract stating that the seller must pay the buyer any difference in price after a specified period of time if the security's price increases, and that the buyer will pay the difference if the security's price decreases. CFDs are traded in many countries in over the counter markets, but they are not allowed in the U.S.