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Commodity and Index CFDs: With and without expiration dates

Not long ago the only way to trade shares were physical trading floors, where people were gathering together and negotiating prices. In 1972 the first electronic stock market emerged - NASDAQ, after which online trading has developed a lot. Till 1987 most trades in NASDAQ were performed by phone calls. In the late 1990s online brokers emerged, offering different trading platforms and instruments, including CFDs.
Over the last 15 years Contract for Difference (CFD) trading has become more and more popular. As a derivative instrument, CFD is an agreement between two parties, which price is based on an underlying asset: an index, a stock or futures. CFD is provided by brokers in over-the-counter market and is considered to be a convenient speculative instrument.

In a very short period traders realised the benefits of trading CFDs over trading the underlying instruments directly in the stock exchange, assuredly this refers to those traders that trade for speculative purposes, not for owning the underlying assets. CFD providers expanded and included trading such popular instruments as Dow Jones, NASDAQ, DAX and many more.

CFD trading has numerous advantages over trading on the stock exchange. Among the most important advantages are the opportunity of margin trading, absence of taxes and high commissions of brokers offering direct market access (around $0.005 per each share), ability of opening short positions that is not allowed in the stock exchange. Due to numerous advantages and the growing popularity of CFDs, in the early 2000s these instruments started to be introduced overseas, like in Australia and other countries.

There are CFDs on futures that are traded round the clock as futures themselves, and are issued for a limited term - more often for one, three months or a year. As the term expires, traders close existing deals and open new positions if they want to stay in the market for long.

As an alternative to expiring CFDs, IFC Markets has developed a completely new synthetic instrument - that is calculated on the basis of a specific formula and has no expiration date. Synthetic futures contract is formed of general futures contracts on one underlying asset, so that at completion of one futures contract and transfer to the next one the price of a synthetic instrument has no gaps and simultaneously reflects correctly the dynamics of the underlying asset price. The company offers these instruments for indices and commodities, thus making trading these instruments much more convenient.

Thus, these instruments allow investors to trade around the clock, paying no attention to expiration dates or exchange session hours, and not having to pay any extra commissions for re-opening their positions. To make things clear it is worthy to take a look at the figure below, where the continuous CFD is presented, derived from S&P 500 index. As can be seen in the figure during the exchange session the CFD matches the index itself. For the rest of time the CFD price equals to the price of the nearest future minus the difference between this future and the index at end of the last exchange session.

So, traders, preferring speculating on commodities and indexes who hold their positions open for a long time, can take advantage of trading continuous CFDs offered by IFC Markets forex broker and avoid any expiration date and the resulting costs and inconveniences.

4 Dec 2015 12:34

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About Boris Dzhingarov

Boris Dzhingarov graduated UNWE with a major in marketing. He is the CEO of ESBO ltd brand mentioning agency. He writes for several online sites such as Tech.co, Semrush.com, Tweakyourbiz.com, Socialnomics.net. Boris is the founder of MonetaryLibrary.com and cryptoext.com.




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