Contract For Difference - CFDs Compared To Other Products

CFDs Compared To Other Products

There are a number of different financial products that have been used in the past to speculate on financial markets. These range from trading in physical shares either direct or via margin lending, to using derivatives such as futures, options or covered warrants. A number of brokers have been actively promoting CFDs as alternatives to all of these products.

Although no firm figures are available as trading is off-exchange, it is estimated that CFD related hedging accounts for somewhere between 20% and 40% the volume on the London Stock Exchange (LSE). A number of people in the industry back the view that a third of all LSE volume is CFD related. The LSE does not monitor the numbers but the original 25% estimate as quoted by many people, appears to have come from a LSE spokesperson.

The CFD market most resembles the futures and options market, the major differences being:

• There is no expiry date, so no price decay;
• Trading is done off-exchange with CFD brokers or market makers (note exception with ASX discussed below);
• CFD contract is normally one to one with the underlying instrument;
• CFDs are not available to US residents;
• Minimum contract sizes are small, so it’s possible to buy one share CFD, low entry threshold;
• Easy to create new instruments, not restricted to exchange definitions or jurisdictional boundaries, very wide selection of underlying instruments can be traded.