Types of CFDs and CFD Assets You Need To Know About

2 months ago forexsimulation Comments Off on Types of CFDs and CFD Assets You Need To Know About

CFDs or contract for differences is defined as a financial derivative instrument that can be sold or bought through the financial market. They are termed as derivatives because their value is drawn from the underlying instruments. They mirror existing assets on different financial markets but do not require the delivery of the actual asset to be traded.

Different types of CFDs can hold different assets for trade. These types are classified into three major CFD categories that traders should be familiar with.  Each of these categories has distinct characteristics to meet different trader preferences.

Listed CFDs

Listed CFDs are types of contracts listed in the public market and thus under the supervision of relevant stock exchanges. These types of CFDs can be traded by the public on a primary and secondary basis, making them different from unlisted, broker-traded CFDs. Even though a broker still undertakes listed CFD transactions, the broker does not make the deals; he is just a facilitator.

This method of functioning benefits the trader in the form of lower exposure to losses. Listed CFDs are purchases the same way shares are purchases, thus offering a guaranteed forced stop to cap the liability of an open position and the total investment.

The ability to preserve investment is the reason listed CFDs are most preferred by traders.

Unlisted CFDs

These are the most common types of CFDs traded. These are broker traded, off-exchange instruments that are exchangeable for the price difference between the time of contract formation and the time of position closing.

As the name suggests, unlisted CFDs are not listed in the stock exchange or in any openly traded market. This allows different brokers to offer different products depending on the needs of their clients. Unlisted CFDs are overseen by brokers where the trader makes an agreement with the broker. They provide unlimited profit possibilities and unlimited loss possibilities since they do not use stops.

Exchange trades CFDs

Exchange trade CFDs are types of contracts traded publicly like listed CFDs. However, they differ in that exchange-traded CFDs offer greater transparency and come with better accountability since a regulated stock exchange oversees them. Exchanges are bigger than third-party CFD brokers and come with better-regulated scrutiny than brokers. For this reason, there is a very low chance that you can encounter an illegitimate trader or unfavorable terms.

Different types of CFDs come with different benefits for the trader to meet them at their trading level and their risk appetite. Even after choosing the best CFD type to venture into, you still need to choose the best assets to trade.

CFD assets available for trading

Stocks

Also referred to as equity, a stock is a type of security where a trader owns a part of a corporation referred to as a share. You can buy and sell stocks in a stock market. However, CFDs offer a cheaper way to trade stock without raising the capital to buy the actual stock.

Trading CFD stocks is based on the price movement of the actual shares in a stock. To trade stocks in the form of CFDs, you only need to open an account with a leading broker offering stock CFD instruments.

Indices

An indice or index is simply a measure of how different securities in a basket perform. It uses market data from the Standard & Poor’s 500 (S&P 500), Dow Jones Industrial Average (DJIA), and any other specialized market to track particular segments or industries.

Compared to stocks, CFD indexes come with lower risk and can be related to the price volatility patterns in both markets. Even so, index CFDs use leverage to offer a more affordable option to traders. This makes CFD trading riskier than trading in the actual asset.

Commodities

In trading, a commodity is a commercially tradable good that is interchangeable with a good of the same type. In commodity trading, most traders prefer to diversify their portfolios when there is stock market volatility. All commodities traded in the financial market range in four categories: metal, energy, agriculture, meat, and livestock.

Commodity CFDs do not involve owning the underlying commodity but instead are based on the price changes in underlying commodities markets. For instance, trading gold CFDs does not require you to own gold. It involves tracking the changes in gold prices to make a profit.

Bottom line

If you are planning to start trading CFDs, it is essential to understand how the market works. With this information, you can choose the type of CFDs to trade and the CFD assets that best suit your trading needs.