Types of contracts for difference
There are many different types of CFDs available to traders, and they vary from country to country, which all have their own regulations. CFDs differ according to the kind of financial asset that underlies each of them. This is one of the advantages of CFDs: they can accommodate virtually any asset.
Contracts for difference are flexible financial instruments that can be applied to many different assets, including global stocks, indexes like the FTSE, Dow, NASDAQ, and NIKKEI, forex pairs, various industries, commodities, the energy sector, metals… the list goes on!
Shares contracts are probably the most popular types of CFD on the market. A CFD is essentially a wager on the movement in the price of and underlying asset, in this case a share price. So, people often feel drawn to share CFDs because they are already familiar with the way that shares work, and they may even feel that they have a good enough grasp of the company’s fortunes to predict price movements.
As the name implies, Index CFDs track the performance of a particular index. Traders often favour contracts based on index performance because they offer high levels of leverage, liquidity, and volatility, which are all ingredients for potentially high profits. Popular examples include the Dow Jones, NASDAQ, FTSE in London, Australian Stock Exchange, and the Nikkei in Japan. People tracking indices think that the whole market will rise during a given period. The benefits of index CFDs include high trading volume, low margin, high leverage, low trading costs, and the ability to play international markets when other methods are impractical or unavailable.
Commodities are things that people need like soybeans, precious metals, crude oil and wheat. Investors lump commodities into two camps—hard and soft, with the former being things that you mine and the latter being things that you grow. These assets benefit from being all of one quality, which economists call fungibility. It’s important because it means that you have one less variable to worry about when you’re trading commodities.
Trading commodities on an exchange can be complicated by different lot sizes and the fact that some exchanges only carry some of the commodities. There are also expiry dates to worry about too, but with CFDs, all of this becomes radically simpler. You are only betting on shifts in price, and you don’t have to worry about storing a single soybean.
Treasury CFDs make it easy for traders to speculate on the value of Treasury notes. Frequently traded examples include US Treasury Notes for different years, US Bonds, Euro-Bund, and Australian Treasury Bonds.
CFDs let you profit from price shifts in a multitude of different assets, and it doesn’t matter where any of them are in the world. And it’s as simple go short as it is long, which means you can even profit from a declining sector.
With sector CFDs, you are betting on shifts in entire industries, like healthcare for example. So there’s no need to do analysis on individual companies. Instead, you take a macro view of the greater economic outlook for that sector, so diversification is already built-in, and volatility is much less of a factor compared to single stocks.
The only thing to look out for with sector CFDs is their tendency towards bigger spreads than you’ll find with CFDs based on individual stocks. If you’re looking at a sector that’s in thrall to a couple of large companies, it might work out as more cost-effective for you to trade CFDs on those companies instead of opening a CFD for the sector.
UK traders can now trade on inflation, as reported each month by the Consumer Price Index (CPI). GFT was the only broker to offer this type of CFD before it was acquired by City Index. They also offered an inflation CFD on the European rate of inflation as reported by the Eurozone Harmonized Indices of Consumer Prices (HICP). The main drawback to inflation CFDs is that liquidity can be low.
Spreads tend to be around 0.1, with a margin requirement of 5%, and you can go long or short. Pay-outs are based on the initially published CPI figures, regardless of any revisions that follow. If you’re worried that quickly-escalating inflation will devalue your portfolio, inflation CFDs offer you a hedge option to fill in for any big losses.
This is another fairly new phenomenon and one that is both financially volatile and politically sensitive. This CFD allows you to trade contracts on changes in emissions values. The carbon pollution program gives permits to signatories which allow them to produce a certain amount of carbon each year. If they reduce their emissions over time, then they are allowed to sell their credits to bigger polluters.
The price of carbon emissions has moved between 8 and 30 Euros per ton during the last couple of years and hovered around 13 Euros at the end of 2009. But it’s worth noting that a Shell VP recently claimed that the actual cost to get rid of a tonne of carbon would be more like 72 Euros.
With all this in mind, Saxo Bank now offers a CFD product based on future emissions, with a minimum trade of 25 tonnes and a 10% margin. While this may be a quite attractive-looking trade, it suffers from being linked to something that is very difficult to predict.