In the beginning
Contracts for Difference originated in the 1980s within the institutional environment. The term back then was ‘equity swap’ and was created for large financial institution’s and banks to hedge their share positions. These trades were costly and required a high level of administration, making them unattractive to retail traders.
Since 1999, CFD trading has been available to retail investors, first spawning in the UK then flowing across the rest of Europe, and now, the world.
Popularity
There are a few different takes on ‘why’ the popularity of CFDs has dramatically increased over the past decade, while I am not sure which of the following have the greatest weight in this growth, I know they were all key contributors.
The UK Financial Services Act which came into effect in 1988 was the beginning. This encouraged individuals to take up private ownership of shares and drew a large number of people to the financial markets. Suddenly everyone had the ability to own a piece of the pie. The constantly moving numbers of the companies and indices on the exchange gave birth to a whole new breed of speculative traders and then, full blown gamblers. The complexity of the stock market meant it was not suited to all types of gamblers, thus spread betting firms started to specialize. Some of these firms converted into the CFD brokers we have today and they brought their customer base with them.
Since the first CFD brokers birth in 1999 their popularity has skyrocketed. Initial interest grew in the UK as traders buzzing with excitement of the stock boom looking to avoid stamp duty turned to CFDs. CFDs continued to grow with the introduction of short positions allowing users to make money on the falling markets and/or hedge their existing portfolios for a margin of the cost.
But possibly the largest key contributor to CFDs has been technology, namely the internet. With the introduction of live remote prices and online brokers, CFD trading became possible from home. Due to the short term positions of CFDs and the high margins, speed to market, accurate prices and systems are vital for successful CFD trading. The internet was the platform to deliver these.