Similar to a forward or futures contract that is cash settled. The amount of the cash settlement will represent the difference between the underlying asset's price agreed at the outset of the contract and its market price at the date of the settlement of the contract. CFDs can be long (that is, where the holder gains from a rise in the price of the underlying asset) or short (that, is where the holder gains from a fall in the price of the underlying asset).

However, unlike forwards and futures, CFDs are open-ended contracts with no fixed settlement date and can be closed out by the holder on demand. CFDs can offer exposure to a variety of financial assets, including single or multiple share indices, debt securities, commodities and currencies. When applied to shares, a CFD is an equity derivative under which the holder generally does not have voting rights or a call option over the underlying shares.

For an overview on forward and futures contracts, see Practice note, Derivatives: overview: Forwards and futures.

For UK corporation tax purposes, a CFD is a contract, the purpose or "pretended purpose" (that is, the aim that the parties are seeking to achieve) of which is to make a profit or avoid a loss by reference to fluctuations in the value or price of property described in the contract, or an index or other factor designated in the contract. For further detail, see Practice note, Derivatives: tax.

As used for electricity, an instrument that converts the risk of a variable price into a fixed price (the strike price). CFDs were re-introduced as a support mechanism for low carbon generation as part of Electricity Market Reform (EMR), as a long-term contract between a low carbon electricity generator and the CFD counterparty. The generator sells the electricity in the electricity wholesale market. When the market price is below the strike price, the generator receives a top-up payment from the CFD counterparty for the additional amount. When the market price is above the strike price, the generator must pay back the difference to the CFD counterparty. For more information, see Practice note, Electricity Market Reform (EMR): Contracts for Difference (CFD).