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Three key differences that make CFDs different from spread trading and single stock futures

by , 25 August 2014

If you want to give trading a go, you'll find that there are a wide number of different derivatives you can use.

Contracts for difference (CFDs) are a popular derivative. So what makes CFDs different from some of the other derivatives out there?

Let's take a closer look…

CFD difference #1: Expiry date

CFDs have no date of expiry. This makes them different from the likes of single stock futures and spread trading.

Take single stock futures. If you open a single stock future trade, it will have an expiry date. In other words, the single stock future contract will expire at some time in the future.

For example, you decide to open a long trade on the ALSI December 2014 contact. This will expire of the third Thursday in December. To keep that trade open at expiry, you’d have to roll the contract over into the next futures quarter, at a cost.

As CFDs have no expiry date, they’re perpetual futures contracts.

CFD difference #2: The price of the underlying instrument

A CFD is a geared cash contract, the FSP Invest experts in The Ultimate Contracts for Difference Guide explain. In other words, the CFD derives its price from the cash price of the underlying instrument.

Let’s look at an example…

You decide to put on a long trade in Company ABC. You want to buy 200 CFDs. The price of the 200 Company ABC CFDs gives you the same exposure that you’d have with 200 Company ABC shares.

When you trade CFDs, you pay the current market price. This is different from the futures price as a futures contract will already have factors like costs and dividends included.

By paying the current market price, the pricing of CFDs is very clear.

But whilst you hold the CFD, you’ll pay the costs and receive any dividends (if you’re long). If you’re in a short trade, you’ll receive the costs and pay the dividends.

Spread trading uses the futures contracts price.

CFD difference #3: What you can trade

You can only trade shares and indices with CFDs. Other derivatives, like spread trading, offer you the chance to trade assets like commodities and currencies too.

So there you have it, three key differences that make CFDs different from spread trading and single stock futures.

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Three key differences that make CFDs different from spread trading and single stock futures
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