If the trader is already familiar with traditional stock exchange markets, and just making the first steps in the world of trading currencies, commodities and other instruments using Contracts for Difference, he/she will notice many similarities. However, there are also several differences that should be mentioned:
Market specifics
Time of trading – stock exchange instruments are traded in accordance with the time of work of the respective stock exchanges. While some of the Contracts for Difference are based upon the stock exchange instruments – their time of trading is limited accordingly, currencies and some of the commodities can be traded using CFDs from Sunday till Friday, 24 hours per day.
Centralised vs decentralised markets – stock exchange instruments are traded on the specified stock exchanges, therefore this approach can be called centralised. In the case of currencies and some of the commodities like gold and silver, the trading is carried out in various financial centres around the globe. We are considering a decentralised structure here.
Liquidity – liquidity of the stock exchange market varies according to the popularity of each of the instruments, in some cases limiting a possibility of executing a transaction at a given price. Typically, the liquidity of each of the CFD instruments allows one to execute the transaction up to the limit specified by the broker.
Instrument characteristics
Risks and financial leverage – trading CFDs is associated with higher risks than is the case for futures and especially shares traded on stock exchanges. This results from the fact that the financial leverage is much easily accessible for CFDs – in many cases operating with those instruments is possible by depositing as low as 1% of the nominal value of the contract.
Costs - the cost of a stock exchange transaction is given as a commission. An indirect cost of CFD transaction is spread – the difference between Bid and Ask prices available for making a transaction.
Prices and spread – trades executed on the stock exchanges can be done instantly at the Bid and Ask prices, and the orders can be set anywhere between, however, the availability of the prices is limited by the liquidity of the market. In the case of CFDs the buy transaction is always done at the Ask price, and the sell transaction at the Bid price.
Trading platform
On-line charts – in the case of stock exchange instruments, it can be a bit challenging to get a good quality of charts, showing the prices of shares, futures and other instruments in real time. With the CFD’s and MetaTrader 4 platform it is possible to watch and analyse the price and charts of all the instruments quoted in real time.
Real time prices – the access to prices of financial instruments quoted on stock exchanges in real time is typically subject to several restrictions. As the CFD instruments are traded on the Over the Counter market, the price is typically available to investors in real time without any additional costs.