CFDs or contract for differences are financial derivatives that can be traded through the financial market. The term ‘derivatives’ means that the value of a CFD is drawn from the value of the underlying instruments. CFDs mirror existing financial market assets but do not require owning the actual assets to trade.
Different CFDs can have different assets for trading. Generally, there are three major CFD categories every trader should be familiar with. Each category has its distinct characteristics for different traders.
Types of CFDs
Unlisted CFDs are off-exchange instruments that are broker traded. They are exchangeable for the price difference between contract formation time and position closing time.
Just as the name implies, unlisted CFDs are not listed in any openly traded market or stock exchange. This is how different brokers are able to offer different products to suit the needs of their clients. Unlisted CFDs are run by brokers under an agreement between the trader and the broker. These type of CFDs do not use stops, therefore providing unlimited profit possibilities and unlimited loss possibilities.
Listed CFDs are contracts listed in the public market, under the supervision of relevant stock exchanges. Listed CFDs can be traded by the public on primary and secondary basis, which differentiates them unlisted, broker-traded CFDs. In listed CFDS, the broker undertakes listed CFD transactions as a facilitator.
This functionality benefits the trader by reducing their exposure to losses. Listed CFDs are bought the same way shares are purchased and come with a guaranteed forced stop to cap liability of open positions and investment.
The ability to protect investments is why listed CFDs are most preferred by traders.
Exchange traded CFDs
Exchange trade CFDs are publicly trades contracts like listed CFDs. However, exchange-traded CFDs have better transparency and accountability since they work under a regulated stock exchange.
Exchanges are bigger than third-party CFD brokers, therefore having better-regulated scrutiny. With exchange-traded CFDs there is a very low chance for a trader to encounter an illegitimate trader or unfavorable terms.
Even after choosing the best CFD type to trade, you still need to choose the best assets to trade.
Types of CFD assets you can trade
In CFD trading, a commodity is a type of commercially tradable good that can be interchanged with a similar type good. In commodity CFDs trading, traders prefer to diversify their portfolios when the market is volatile. CFD commodities traded in the financial market can fall into one of four categories. These include meat and livestock, metal, energy, or agriculture.
To trade commodity CFDs, you do not have to own the underlying commodities. Instead, your trade is based on the price changes of the underlying commodities in the markets. For instance, you do not need to own real gold to trade in gold CFDs. You can make profits by simply predicting and tracking changes in gold prices.
Stocks, also referred to as equity, are a type of security where a trader has to own part of a corporate entity by investing in a share. While stocks are normally bought and sold in a stock market, CFDs give interested investors a cheaper way to trade stocks without owning the stock.
CFD stocks trading depends on price movements of the actual shares in a stock market to make a profit. You can trade stocks in CFDs by opening an account with a leading broker site that offers stock CFD instruments.
An indice or index is a form of CFD that measures of how different securities in a basket perform. Indices use market data from industry acclaimed specialists like the Standard & Poor’s 500 (S&P 500)and Dow Jones Industrial Average (DJIA)to track particular segments or industries.
Compared to stocks, indices have lower risk and relate to price volatility patterns in both markets. Even so, indices CFDs use leverage to offer an affordable option to traders. This is why index CFD trading is riskier than trading in the actual asset.
If you plan to invest in trading CFDs, it is highly beneficial to take the time to understand how the market works. With the information in this article, you can now choose the type of CFDs to trade and the best CFD assets for your trading needs.