CFD Alternatives

Futures

Some professionals prefer futures over CFDs due to interest rate and indices trading. Futures are exchange traded and also a mature product. However, the benefit of using CFDs instead of futures is that for CFDs the size of the contracts is smaller, so it is more accessible to small traders, added to a more transparent price. Compared to CFDs, the price in the futures contracts have the tendency to decay close to the expiry date, while the underlying instrument price never expires, so it doesn’t occur on CFDs; it is a simple reflection of underlying instruments.

CFD providers often use futures to hedge the positions they are holding. Because it is easy to obtain futures prices, many futures get written over by CFDs. As there is no expiry date on the CFDs, the contract deals with the expiry date of the futures contract when the CFD is written over such futures contracts. The CFD position is usually “rolled” by the CFD provider to the following future period when there is low liquidity a few days before the expiry date. This way, the CFD contract is rolling.

Options

Just like futures, options are also an established product used by professionals, centrally cleared and exchange traded. Like in the case of futures, options can serve to hedging risk or for speculating by taking on risk. In this latter case, options are comparable to CFDs because they can be used for market speculation. The advantages that CFDs have over futures is the underlying instruments range and price simplicity. The pricing of options is more complex compared to CFDs and the price decay settles near the expiring date. CFDs prices are just a reflection of the underlying instrument. However, options can be better used to reduce risk than CFDs.

Covered warrants

It is only over the past few years that covered warrants got popular, just like options trading. They emerged as a possibility to speculate on market movements without much investment. On short term, CFDs cost less and the underlying products range is much wider. Some brokers on markets such as Singapore give a lot of support to CFDs and promote them as alternatives to using covered warrants. This practice might have lead to the decline of covered warrants volume in Singapore market.

ETFs

ETFs stands for Exchange traded funds and are used especially for speculations on short terms, just like the CFDs. They are also available over many different underlying products such as commodities, indices, overseas markets which were considered among the CFDs strengths. ETFs can be used on groups of instruments which are customized, like baskets or sectors. The use of leverage is being set up to more and more ETFs.  ETFs are, just like options and futures but unlike CFDs, exchange traded products. They have been used for a longer time than CFDs, so they are more mature from the product’s life point of view. Being an exchange traded product, the costs are also higher and it can be accessed through a traditional broker.

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