Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

What is derivative trading and how do I start trading derivatives?

This article explains what a derivative contract is, how derivatives are traded, and the types of derivative products that you can trade. Explore how to start trading derivatives and get an overview of some of the risks and benefits involved. Read on to learn about derivative trading strategies and how you can trade derivatives with our award winning* Next Generation trading platform​.

See inside our platform

Get tight spreads, no hidden fees and access to 11,000 instruments.

What is a derivative contract?

A derivative contract is a contract between two or more parties where the derivative value is based upon an underlying asset. Common underlying financial instruments include stocks, currencies, and commodities. The price of the derivative is determined by the price fluctuations of the underlying asset. Derivatives can be traded on an exchange or over the counter​ (OTC), which means trading through decentralised dealer networks rather than a centralised exchange.

What is derivative trading and how does it work?

Derivative trading is when traders speculate on the future price action of an asset via the buying or selling of derivative contracts with the aim of achieving enhanced gains when compared with buying the underlying asset outright. Derivative trading has grown in popularity since the 1980s, and investors can now trade derivatives on a range of financial markets including stocks, currencies, and commodities.

Traders can also use derivatives for hedging purposes in order to alleviate risk against an existing position. With derivatives, traders are able to go short and profit from falling asset prices. Therefore, they can use derivatives to hedge against any existing long positions.

Trade derivatives on thousands of assets with CMC Markets

Leverage with derivative trading

Trading with leverage​ on derivatives involves entering into a buy or sell position and speculating on which way their chosen market will move, using a reasonably small margin/deposit. Without the investor actually owning the underlying asset, their profits or losses will correlate with the performance of the market. However, leverage will cause these profits/losses to be magnified when compared with buying the underlying asset outright.

Risk management when trading derivatives

To help reduce risks in trading leveraged derivatives, it is important to plan a trading strategy​ in advance. A popular risk-management tool traders can use when trading with leverage is a stop-loss. By implementing a stop-loss order​ to a position, a trader can limit losses if the chosen market shifts in an unfavourable direction. However, it is important to be aware of potential risks, such as the market experiencing a negative short-term fluctuation, which could activate the stop loss order before the market conditions improve again. Explore our risk-management​ guide to learn more about how to protect your money in trading.

Types of derivatives to trade

There are several types of derivative products that you can trade, with each of them having significant differences in their details, risks and benefits. Spread betting, CFDs, forwards, futures and options are some of the most popular types of derivatives among traders.

Spread betting

Spread betting​ is a popular derivative product. It is a tax-efficient** way of speculating on the price movement of financial instruments​, including forex, indices, commodities, and shares. Without purchasing and taking ownership of the underlying asset, traders can bet on whether they predict the price to rise or fall. If the expectation is for the value of a security to rise, then a trader may look to buy, otherwise known as opening a long position. If they expect the asset to fall in value, then they may look to sell, which is also known as ‘going short’. The profit or loss made is based on whether or not the market moves in the chosen direction. The investor buys or sells a pre-determined amount per point of movement for the traded instrument, which is known as the ‘stake size’. For every point that the price moves in a favourable direction, they will gain their stake multiplied by the number of points by which the instrument price has moved in their favour. On the other hand, they can lose multiples of their stake for every point the price moves against them. With spread betting, losses are based on the full value of the position. Explore our page about understanding spread betting​ to learn more.

Benefits and risks of spread betting:

There are many advantages of spread betting​. For example, spread betting is a form of margin trading, which means that you can open larger or more positions than you would be able to if you had to fund the full value of the position. This is because you are borrowing funds from the broker.

There are several risks of spread betting​ to be mindful of, including the fact that margin trading​ can increase your losses as well as profits as they are relative to the full value of the position. Another risk to note is that market volatility and rapid price movements may occur outside of normal business hours when spread betting on international markets. This can have an effect on your positions, potentially cause your account balance to change quickly. If your account has insufficient funds to cover these situations, there is a risk that your account will drop below the close-out/margin requirement level. This will result in your positions being automatically closed by the platform. Therefore, it is important to consistently monitor your account to ensure that the funds cover your total margin requirement.

Trade derivatives on thousands of assets with CMC Markets

Seamlessly open and close trades, track your progress and set up alerts

CFD trading

CFD trading​ (contracts for difference) is another leveraged derivative product that enables traders to speculate on short-term price movements. It is a contract between two parties to exchange the difference between the opening and closing prices of a specified financial instrument at the end of the contract. Similar to spread betting, you do not actually own the underlying asset. Instead, you buy or sell a number of units for a particular asset depending on whether you think the movement of price will rise or fall. You gain multiples of the number of CFD units you have bought or sold for every point the price of the instrument moves in your favour. In the opposite scenario, when the price moves against you, you will make a loss. You can trade CFDs on many financial instruments with us. Learn more about understanding CFDs​, the costs involved and gain insights from a variety of examples.

Benefits and risks of trading CFDs:

There are a range of benefits of trading CFDs​. One example is that you can trade on the price of a product that is falling as well as rising. Therefore, you can aim to benefit from going short and selling as well as buying opportunities, which is also true for spread betting. Through periods of short-term volatility, many investors trade CFDs as a way of hedging their existing portfolios. Another advantage is that, similar to spread betting, there is no stamp duty to pay, however capital gains tax would need to be paid.

There are however, risks of trading CFDs​ to be aware of, for example gapping. Gapping occurs when the price of an asset suddenly moves from one level to another, without passing through the level in between. Traders may not always have the opportunity to place a market order between the price levels. Gapping arises as a result of market volatility. It is possible to limit the risk and impact of market volatility by applying an order boundary or guaranteed stop-loss order. Another aspect to be aware of is CFD holding costs​. These are charged to your account if you hold positions on certain securities overnight past 5pm New York time.

Forward trading

Forward trading​ is a transaction between a buyer and seller to trade a financial asset at a future date and at a specified price. The forward contract’s value is based on the stability of the underlying asset and it includes the agreement of the asset price and trade date. Forward trading is an alternative to purchasing an asset at spot price. 

​We offer forwards contracts on commodities, indices, treasuries and foreign exchanges​. 

Benefits and risks of forward trading:

An advantage of forward contracts is that the agreement to buy and sell at a specific price in the future ensures that your position is protected from unfavourable market movements. However, this can also act as a disadvantage because the price can fluctuate in a favourable manner and the asset can become more valuable. As you are locked in at a specified price, you will not be able to take advantage from this movement in price.

Options and futures

An option is an agreement between two parties that gives the buyer the right, but not the obligation, to purchase or sell an asset at a set price on or prior to a specific date. Options can be traded on several types of underlying securities such as stocks, ETFs, and indices. Forex options​ work in the same way but are specific to currency pairs and are driven by factors such as interest rates, inflation expectations, and geopolitics.

Futures trading​ is the trading of financial instruments as contracts via a futures exchange. It is an agreement between parties that an asset will be exchanged at a predetermined price and date in the future. One party is obligated to purchase the asset once the futures contract expires whilst, when expired, the other party is obliged to produce the asset.

It must be noted that we do not offer the opportunities of trading options or futures. However, our trading platform does offer you the opportunity to trade forward contracts, which are an underlying form of futures, on a wide range of financial markets and assets.

Derivative trading strategies

With derivative trading, having a trading strategy is vital in deciding your entry and exit points. It is important to fix a plan that is built to achieve gains, limit losses and manage risk as much as possible.

Short-term traders​ such as day traders​ focus on following trends that arise throughout the day in short periods with the aim to gain from short-term price movements. There are several well-known strategies for short-term traders, such as scalping​, which is where traders aim to make a profit from small price fluctuations, before and after executing a trade. Long-term trading involves holding on to a position for longer periods. Long-term traders make decisions based on fundamental analysis​ that mainly focuses on how the market will look in the future. Position trading​ is a popular long-term strategy, which enables traders to hold a position for a long period of time. Without concerning themselves with shorter-term trend movements, position traders’ focus is on the long-term objective.

Explore some of the most common trading strategies​ that exist, which could be extremely helpful in building your own trading plan​.

How to trade derivatives in the financial markets

You can trade on thousands of financial instruments with CMC Markets via derivatives, which are explained in further detail below.

Derivative trading in the stock market

You can trade on the price movements of stocks​ through spread betting and CFDs trading. Our trading platform offers you the opportunity to trade derivatives on thousands of shares. You can also trade derivatives on exchange-traded funds (ETFs). These are investment funds that hold a collection of underlying assets, such as shares, commodities and bonds. Learn more about ETFs​ and how you can trade on them with our Next Generation platform.

Currency derivatives trading

With CMC Markets, you can get exposure to over 330 currency pairs by way of spread betting and trading CFDs, which is the largest forex market offering in the industry***. Trading derivatives on forex indices​ is an effective way of investing in some of the most popularly traded currencies, such as GBP, USD and EUR. You can trade on our 12 baskets of forex pairs, which includes the popular CMC USD Index, giving you exposure to multiple currencies in just one trade.

Commodity derivatives trading

Traders can also spread bet and trade CFDs on a wide range of commodities​, which are categorised into either hard or soft varieties. Examples of hard commodities includes natural resources like gold and oil, whereas soft commodities are agricultural products, like wheat and coffee. Discover more about how to trade commodities​.

How to trade in the derivatives market with CMC Markets

Open a live account today to start trading on the underlying price movements of financial instruments through spread betting or CFDs. Before placing your trade, make sure you have understood and followed risk-management guidelines. Apply any risk-management orders, such as stop-loss orders, and confirm your trade.

Derivatives trading platform

Our award winning platform has a wide range of exclusive trading tools and technical features that we offer to aid your derivative trading strategies.

Once you have registered for an account, you can start to trade on over 10,000 financial instruments, which are displayed in our Product Library. We also have some pre-determined categories that are exclusive to the platform, such as the biggest share risers and fallers of the day in price. Our ‘Hot Products’ feature is updated hourly with financial instruments whose recent trade volume has increased significantly versus the monthly average.

Visit our dedicated pages on how to spread bet and how to trade CFDs to fully understand and learn how to trade these derivative products on our Next Generation trading platform.

Summary

In summary, derivative trading has grown in popularity, with investors being able to trade derivatives on a vast range of financial instruments, such as stocks, currencies, and commodities. Open a live account today to start spread betting or trading CFDs on our Next Generation trading platform. You can also benefit from our news and insight tools to keep track of news about your preferred assets and industries.

FAQS

What is derivative trading?

Derivative trading is when traders speculate on the potential price action of a financial instrument with the aim of achieving gains, all without having to own the asset itself.

What are examples of trading derivatives?

Examples of trading derivatives include spread betting, CFDs, and forwards. These are some of the most popular types of derivatives among traders.

What markets can be traded as derivatives?

You can trade derivatives with several financial markets and instruments including stocks, forex, indices and commodities. You can trade on over 10,000 financial instruments with CMC Markets via derivatives.

How do I start trading derivatives?

You can trade derivatives on over 10,000 financial instruments with our Next Generation trading platform. With our platform guides, you can browse a wide range of trading tools, charting features and order types that are available on our platform.

*No1 Web-Based Platform, ForexBrokers.com Awards 2020; Best Telephone & Best Email Customer Service, based on highest user satisfaction among spread betters, CFD & FX traders, Investment Trends 2020 UK Leverage Trading Report; Best Platform Features & Best Mobile/Tablet App, Investment Trends 2019 UK Leverage Trading Report.

**Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

***Most Currency Pairs, Forex Brokers 2020 Awards

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

burger-close