The instruments, side by side
Spot currency
- What you hold
- One currency, bought with another
- Do you own the underlying asset?
- Yes, once settled; a margin account usually rolls the position on instead
- Where it trades
- Over the counter, between banks and dealers
- Does it expire?
- No, though each trade has a settlement date
- Leverage
- Through margin
- The most a buyer can lose
- With margin, possibly more than the deposit, unless rules or the provider cap it
- Cost of holding it
- Rollover interest each night, on margin
CFD
- What you hold
- A contract with a provider on a change in price
- Do you own the underlying asset?
- No
- Where it trades
- Over the counter, with the provider
- Does it expire?
- Usually not
- Leverage
- Through margin
- The most a buyer can lose
- With margin, possibly more than the deposit, unless rules or the provider cap it
- Cost of holding it
- Overnight financing
Future
- What you hold
- A standard contract to buy or sell on a set date
- Do you own the underlying asset?
- No, unless held to delivery
- Where it trades
- On an exchange
- Does it expire?
- Yes, on a fixed date
- Leverage
- Through margin
- The most a buyer can lose
- With margin, possibly more than the deposit, unless rules or the provider cap it
- Cost of holding it
- No daily charge; the cost of carrying is in the price
Option
- What you hold
- A right, not a duty, to buy or sell at a set price
- Do you own the underlying asset?
- No, unless exercised
- Where it trades
- On an exchange, or over the counter
- Does it expire?
- Yes, on a fixed date
- Leverage
- Built in: a small premium stands for a larger amount
- The most a buyer can lose
- The premium paid
- Cost of holding it
- No charge; its time value wears away
ETF
- What you hold
- A share in a fund that holds a basket of assets
- Do you own the underlying asset?
- No: the fund owns the assets, you own part of the fund
- Where it trades
- On an exchange
- Does it expire?
- No
- Leverage
- None, unless bought with borrowed money
- The most a buyer can lose
- The amount paid
- Cost of holding it
- The fund’s annual charge
Share
- What you hold
- A part of a company
- Do you own the underlying asset?
- Yes
- Where it trades
- On an exchange
- Does it expire?
- No
- Leverage
- None, unless bought with borrowed money
- The most a buyer can lose
- The amount paid
- Cost of holding it
- None, beyond any account fee
How to read this table
Each column is one instrument. The rows that separate them most sharply are ownership, expiry and the most a buyer can lose. The words describe each instrument as it generally works; the terms of a particular contract, exchange or provider decide the detail, and rules for retail clients differ from country to country.
Each one, in a paragraph
Spot currency
A spot trade exchanges one currency for another at today’s price, for settlement shortly afterwards: two business days later for most pairs. There is no central exchange; banks and dealers quote prices to one another and to their clients. A person trading currencies on margin through a broker rarely takes delivery: the position is rolled forward each night, and the interest difference between the two currencies is charged or paid as it is.
CFD
A contract for difference is an agreement with a provider to exchange the change in a price between the time the contract is opened and the time it is closed. Nothing is delivered and nothing is owned: there is no share, barrel or bar behind the holder’s name. The provider is the other side of the contract, so its standing matters. CFDs are traded on margin and are not permitted for retail clients in every country.
Future
A future is a standard contract, traded on an exchange, to buy or sell a set amount of something on a set date at a price agreed today. Both sides post margin with a clearing house, which stands between them, and gains and losses are settled every day. Most futures are closed before the date arrives; some settle in cash and some by delivery. A future’s price differs from the spot price by the cost of carrying the asset to that date.
Option
An option gives its buyer the right to buy (a call) or to sell (a put) at a set price up to or on a set date. The buyer pays a premium for that right and can lose no more than the premium. The seller of an option is in a different position: the seller receives the premium and takes on the obligation, and a seller’s loss can be many times the premium. An option’s value depends on time and on expected volatility as well as on the price, so it can lose value while the price stands still.
ETF
An exchange-traded fund is a fund whose shares are bought and sold on a stock exchange like any share. The fund holds, or otherwise tracks, a basket: an index of shares, a set of bonds, a commodity. Its price follows the value of the basket closely but not exactly, and the fund takes an annual charge from its assets. Some funds are built to multiply or reverse a daily move; those behave differently over more than a day and are a separate subject.
Show me two side by side
Choose any two. The rows on which they give different answers are marked; the rest are the same for both.
Spot currency and CFD differ on 5 of 7 rows and give the same answer on 2.
- What you holdDiffers
Spot currencyOne currency, bought with another
CFDA contract with a provider on a change in price
- Do you own the underlying asset?Differs
Spot currencyYes, once settled; a margin account usually rolls the position on instead
CFDNo
- Where it tradesDiffers
Spot currencyOver the counter, between banks and dealers
CFDOver the counter, with the provider
- Does it expire?Differs
Spot currencyNo, though each trade has a settlement date
CFDUsually not
- LeverageThe same
Spot currencyThrough margin
CFDThrough margin
- The most a buyer can loseThe same
Spot currencyWith margin, possibly more than the deposit, unless rules or the provider cap it
CFDWith margin, possibly more than the deposit, unless rules or the provider cap it
- Cost of holding itDiffers
Spot currencyRollover interest each night, on margin
CFDOvernight financing
Result, as a share of the money put down
A drawing of the mechanism. Choose one of the instruments beneath it and the sentence says what the drawing shows.
Spot currency on an example margin of 10%: the result line is steep, and a fall of one tenth in the price takes all of the money put down.
An illustration. The 10% margin and the 4% premium are examples chosen to draw the lines; they are not anyone’s terms. Costs are left out.
Questions people ask
- What is the difference between a CFD and a share?
- A share is a part of a company that its holder owns. A CFD on that share is a contract with a provider that pays or charges the change in the share’s price; the holder owns nothing and has no vote. A CFD is traded on margin and usually carries a nightly financing charge; a share bought outright has neither.
- What is the difference between a future and an option?
- A future binds both sides to trade on the set date at the agreed price, unless the position is closed first. An option gives its buyer the right to trade but no duty to: the buyer can let it lapse and lose only the premium. The seller of an option does take on a duty.
- Is spot forex the same as a currency CFD?
- They are close in practice and different in form. A spot trade is an exchange of two currencies for settlement; a currency CFD is a contract on the change in the exchange rate with nothing exchanged. For a person trading on margin both are usually rolled each night and neither ends in delivery. Which one an account offers is stated in its terms.
The words on this page
A general explanation for study. It is not advice or a recommendation, it does not say which of these to use, and it does not describe the terms of any account. What GIO4X itself offers is set out on Markets, not here.