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What makes CFDs different from other trading instruments?

by , 13 May 2015

When it comes to trading, you have a number of trading instruments at your disposal.

If you decide to trade contracts for difference (CFDs), what makes them different to other derivatives products on the market?

Let's take a closer look…

CFDs don’t expire, unlike other derivatives

CFDs have no date of expiry. This makes them different to other derivatives like single stock futures.

Single stock futures generally expire on a quarterly basis as do many spread trading contracts.

The underlying instruments of CFDs

CFDs are geared cash contracts. This means their price comes from the current price of the underlying instrument. You pay the spot price for CFDs.

One CFD is equal to one underlying share.

For example, if you buy 100 Sasol CFDs, you have exposure to 100 underlying Sasol shares. You would pay a fraction of this overall exposure through a margin.

On the other hand, when you trade single stock futures, one contract equals 100 underlying shares. So one Sasol single stock future gives you exposure to 100 underlying Sasol shares.

With CFDs, you can only trade shares and indices. Other derivatives, like spread trading, offer you the chance to trade other instruments like currencies and commodities.

CFDs aren’t exchange traded

You trade CFDs through companies and stock brokers providing CFD trading. They make a market for the trade of these instruments.

On the other hand, single stock futures are exchange traded. In South Africa, they trade through the Johannesburg Stock Exchange and due to this are standardised.

The similarities of different trading instruments

Whilst CFDs differ from single stock futures and spread trading, there are some similarities. They are all derivatives. This means they derive their value from something else.

These trading instruments are all geared. Through trading on margin, you can benefit from the money multiplying effect at work. But this can work against you.

Trading on margin is what makes trading risky. You can potentially lose more than you put down on a trade.

So there you have it. What makes CFDs different from other trading instruments.

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What makes CFDs different from other trading instruments?
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