Types of CFDs
Contracts for difference come in a variety of different types, broadly classified into three categories: unlisted, listed and exchange traded. Each has its own distinct properties, and depending on your trading preferences will be more or less suited to your requirements. We've broken down the three most significant classifications below to give you an idea of what each has to offer, to help better inform your trading decisions.
By far and a way the most common type of contracts for difference, unlisted CFDs are those of which we traditionally know as CFDs - that is, broker traded, off-exchange instruments exchangeable for the difference in price between the point the contract is formed and the point at which the position is closed. Unlisted CFDs are facilitated by the broker, and are essentially agreements with the broker, providing both unlimited upside gains and unlimited losses (without the interplay of stops). As the name suggests, unlisted CFDs are not listed on any stock exchange or openly traded market, with different brokers offering different products accordingly.
By contrast, it is also possible to trade listed CFDs, which differ in a number of key points. Primarily, listed CFDs are listed on a public market and thereby supervised by the relevant stock exchange. Listed CFDs are tradable by the public on both a primary and secondary basis, and are therefore distinct from unlisted, broker-trader CFDs. In practice, this means that while transactions are still conducted through a broker, and there is very little in the way of noticeable difference from trade to trade, deals are actually being facilitated by the broker rather than being made with the broker.
This function provides a further benefit for traders, in the form of a limited downside exposure. Unlike unlisted CFDs, which traders are required to fund to the extent to which positions are negative, listed CFDs are purchased in the same way as shares, with an automatic and free guaranteed stop which puts a cap on the liability of the position at the total initial investment. This effectively removes the major disadvantage of trading unlisted CFDs, whilst still providing the leverage and the same style of trading instrument.
A third type of contract for difference, albeit less widely available than the preceding two, is the exchange traded CFD. Exchange traded CFDs are traded publicly like listed CFDs, but benefit from a greater degree of transparency and enhanced accountability that comes with the oversight of a regulated stock exchange. Additionally, because exchanges are more sizeable than most third party CFD brokers and regulated with far more scrutiny than any broker on the planet, the chances of encountering an illegitimate trader or unfair terms of business are far slimmer.
Every different type of contract for difference has its own advantages, and depending on your specific trading level, appetite for risk and price-sensitivity, you may be more suited to one particular type. As a result, it is advisable that you look into the different options when deciding how to invest, and potentially consider diversifying your trading as you start to become more experienced to account for a wider cross-section of trading instruments.