If short-selling involves dealing in shares you have borrowed from others, contracts for difference entail dealing in what are effectively mirror images of the underlying shares.
Contracts for difference, in the nature of derivative products, allow investors to take a position on a share, index or other asset without actually owning it.
One advantage is that holders of contracts for difference benefit from dividends that accrue during the term of the contract.
Essentially, a contract for difference is an agreement to exchange at the end of a "contracted" period the difference between the prices at the beginning and the end of the contract multiplied by the number of shares involved in the deal.
Contracts can be "long" or "short", depending on whether the investor sees the share price rising or falling respectively.
As with most derivative products, contracts for difference first emerged in Britain, which is still the dominant market.
They are available through stockbrokers and online, although charges differ.
Traditional brokers will probably charge commission while newer online rivals - like Global Trader, an Irish-based operation which was set up last week - tend to build their cut into the margin they offer on the contracts. They claim that overheads on automated online operations are up to 80 per cent lower than more traditional brokerages.
One of the key features setting contracts for difference apart from other derivative products is the fact that, apart from any commissions, investors also pay interest on "long" contracts.
However, like most other derivatives, these contracts are margin products where the investor puts down only a margin or deposit on the value of the deal. This deposit varies from broker to broker, ranging anywhere from 5 to 20 per cent on equities and lower on other assets.
Contracts are established with a limited life although this can be rolled over or extended. The contract value is adjusted each day to reflect the changing value of the underlying share.
Another advantage of contracts for difference is that they avoid the stamp duty applicable on actual share dealings. However, tax will be chargeable on any profit from the deal.
As with many derivatives, regulation may become an issue as they become more widely available to retail investors. At the moment, there is no protection for investors should a company go bust holding their margin on a contract for difference.
This is true for other forms of derivative trading and looks set to become an issue for the new single financial regulator, IFSRA, when it eventually becomes active.
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