Index futures and/or index futures CFDs refer to a basket of top stocks traded in an exchange. Similarly, sector index CFDs refer to top stocks within a specific industry. A bank index, for example, has top banks as its constituents.
An index or sector futures contract is an agreement to buy or sell an index at a specified future date at an agreed price and a cash settlement occurs on expiry of the contract. Index futures CFDs on the other hand are not settled for cash but automatically carried over to a new date by the product provider.
CFDs are contracts for difference and you trade in the underlying reference instrument (in the present context, an index futures contract) without actually owning it. Your trade for the price fluctuations and your profit or loss is the difference between the price when you enter and exit a position. The counterparty in CFDs is the CFD provider with whom you must complete all transactions in relation with the position you open. All closing positions must necessarily be equal and opposite of the open positions.
Index futures CFDs are derivative products just like index futures contracts but the problem with trading directly on a futures exchange is that there are standardised contracts that specify position size and expiry date. In contrast, CFDs are customised derivative products without a standard form. CFDs are also simpler to understand as they trade at the spot price with a small commission or the providers spread reflected as the difference between bid and offer quotes.
However, there is a risk involved in CFDs because they are offered over-the-counter and not regulated products. Much depends upon the credibility of the broker you choose to trade with.
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