Characteristics of CFDs
CFDs are a derivative trading instrument; they derive their pricing from an underlying asset. CFDs differ in many ways to traditional forms of derivatives such as as futures and options.
CFDs are always cash settled and the settlement is always that of the difference between the opening and closing price of the contract.
In many cases CFDs do not expire unlike futures and options contracts, this enables traders to continue holding positions without the cost of rolling a contract or closing a contract to enter a new contract with a different expiry date.
CFDs enable you to pay financing as a separate cost and, in most cases, trading commissions as well.
While the price of a contract for difference mimics the undying asset it follows, transactions using CFDs can be VERY different to purchasing the asset itself.
When trading CFDs, every trader should be aware of the two types of provider in the market. Market Makers and Direct Market access (DMA). Understanding the real differences between the models is essential before selecting a CFD Provider. An explanation of CFD models and differences will be covered in further CFD Tutorial posts.