Contracts for difference and futures are derivative products of the financial markets. Traders can invest in these different kinds of investments to ensure high market profits.
However, they both have different functions in the financial markets and therefore share some differences. Here we'll be analyzing these key points that set them apart and demolish the confusion of traders and investors.
Difference between CFDs and Futures
Many beginners get confused with the derivative trading instruments as they belong to the same category. They are the same in some aspects, such as their leverage benefits, but they work differently in the market.
To understand and trade them better, we have the following points to analyze the differences. So, let's begin with CFDs vs Futures:
What are CFDs and Futures derivatives?
Contracts for difference are the agreements between two parties of the trade. Made in financial derivatives where the difference is settled between the open and close trade prices.
The trade does not involve any physical delivery of goods and services; thus, it is a cash-settled transaction.
Introduced recently, the trading style is an advanced strategy preferred by experienced market traders. Although the strategy is not allowed in the US.
In simple terms, CFDs are financial contracts that pay the difference between the open and close trades.
In comparison, futures are the exchange-traded derivative instruments. In this, the trader buys and sells the underlying instrument at a determined price and specified future date.
This is why it is called the futures contract and works in the same way as CFDs, as both take place in the future based on today's market price.
Availability
CFDs are available with brokers and financial institutions internationally in various markets. A trader can invest in CFDs with the following markets:
- Commodities
- Stocks
- Forex
- Stock indices
Whereas futures could be traded through exchanges significantly. A trader can go with futures trading with various markets such as:
- Forex
- Stock
- Commodities
- Indices
- Cryptocurrencies
- Metal
So, there is a wide range of markets that traders can select futures trading with, while CFDs have fewer options comparatively.
Trading
When trading CFDs, traders can go with brokers as there is no centralized exchange. They can invest in instruments exclusively through the over-the-counter (OTC) market.
Thus, broker-based trading is where they place their trades using the direction of the market.
Futures trading, on the other hand, involves trading exchanges. They work with properly regulated exchanges which ensures stability for the traders. They can find the instruments online on exchanges and trade.
Moreover, CFDs could be traded on futures or spot prices. Thus, traders of CFDs have exposure to the futures market.
Obligation in Trade
CFD contract is free of any market obligation, and traders are not abode by the trade. They can trade freely without the obligation of executing the trade on a fixed date.
While futures contracts are obligatory and require traders to execute the trade on the set date and time. If they miss that, they may have to face the consequences.
Benefits of CFDs vs Futures
CFD traders have a number of benefits that they can enjoy while investing in the market. Here we the list of advantages:
- It allows the trading of shares, ETFs, forex, indices, commodities, and cryptocurrencies.
- CFDs have tighter spreads as they trade on spot prices.
- Traders can go for long and short-term trading with CFDs.
- It provides leveraged trading that can enhance the potential for profit and loss.
Futures, in contrast, has the given advantages for the traders:
- Futures allow the trade of commodities, indices, forex, and bonds.
- It does not have overnight funding charges with future prices.
- Traders of the future market can go long and short in market trading.
- Futures traders have leverage trading options.
Transparency of Trade
Futures are traded on open public exchanges with trade from various investors. This means the derivative is traded in a large and liquid market. So, the prices of instruments are reflected in the market. Thus, it has the transparency of trade.
CFDs prices are incorporated from the futures market price, which is later adjusted to suit the broker. That's why CFDs do not have as much transparency as futures.
Cost-Effectiveness
Futures contracts are more cost-effective than CFDs as they have a commission structure. As a result, they save transactional costs and have a cost-effective way of doing the business.
Liquidity
When it comes to liquidity, CFDs are more liquid than futures as they are largely traded, and that too directly with the brokers.
Expiration
CFDs do not have any expiry date, whereas futures contracts are based on expiration periods. Traders decide the date in advance for the trade and accordingly act, while CFD traders are free to trade without any expiry period.
Conclusion
CFDs or futures both have their advantages and disadvantages; traders can find the best that suits their market trading style. The article has discussed the two in detail with key areas that set them apart.
Traders can go through the above information to decide on their instrument and know the trading derivatives.
No matter whether you trade futures or CFDs, the one thing is common: you'll need a trading account. Without it, you can’t have access to the financial market. So, open your trading account with a reliable brokerage platform such as InvestFW and start your trading journey today.
