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I'm trying to understand how CFD works. I have question about market maker.

Who is market maker for CFD? Is it a company which provide a trading platform or any stock exchange?

EDIT01 @noob2 thanks for your answer. I have another question: what is the underlying security for indices CFDs?

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    $\begingroup$ CFD is not really a "derivative", although it is presented as such. There are no market makers. It is just an agreement between you as the client and a broker/dealer who can buy sell the underlying security for his own account. So it is just a legal construct to avoid Stamp Duty, not a market security. $\endgroup$ – noob2 Oct 21 '15 at 20:32
  • $\begingroup$ @noob2 this should be posted as an answer. $\endgroup$ – SRKX Oct 22 '15 at 1:48
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CFD is not really a "derivative", although it is presented as such. There are no market makers. It is just an agreement between you as the client and a broker/dealer who can buy sell the underlying security for his own account. So it is just a legal construct to avoid Stamp Duty etc., not a traded security.

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  • $\begingroup$ What is the underlying security for indices CFDs? $\endgroup$ – torm Oct 22 '15 at 18:44
  • $\begingroup$ Could be an ETF, could be futures,... It depends. $\endgroup$ – noob2 Oct 23 '15 at 19:39
  • $\begingroup$ So, a CDFs broker/dealer decide what the underlying security will be and it is its risk, doesn't it? $\endgroup$ – torm Oct 23 '15 at 19:45
  • $\begingroup$ That's exactly what I think. $\endgroup$ – noob2 Oct 23 '15 at 19:58
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    $\begingroup$ When there is an underlying and the price of the CFD is derived from that one why wouldn't it be a derivative? $\endgroup$ – vonjd Feb 18 '16 at 13:39
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I wouldn't say it is not a derivative, CFD is for sure a derivative, you don't need any secondary market to be traded with CFDs to make it a derivative. So it is a derivative, only problem is, there are many companies issuing them and if they go bankrupt, you can lose your money. Most companies offer just a few of CFDs though, but some like ETX Capital for example (http://trade-test.com/etx-capital-review) offers around 6000 of CFDs, biggest offer that I am aware of.

An advantage of CFDs is that it can be much cheaper than its base asset as spread is made by the issuing company that can be any broker like that ETX Capita, or Plus500 or Oanda or whatever. And they can sell you CFD with a fraction of spread you would normally pay on a regular market. So conclusion:

  • Risky: yes, somewhat.
  • Cheaper: yes.
  • Do you own asset: no.
  • Do you get dividends: yes.
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