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CFD vs Futures: what are the differences?

CFDs and futures are both financial instruments that allow traders to speculate on the price movements of assets. However, some critical differences between the two make them suitable for different trading strategies.

CFDs, or Contracts for Difference, are a type of derivative product that allows traders to theorize on the price movement of an underlying asset without actually owning it. On the other hand, futures contracts are agreements to buy or sell an asset at a set price at a future date. Both CFDs and futures can trade a wide range of assets, including commodities, indices, stocks and currencies.

The way they are traded

One key difference between CFDs and futures is how they are traded. CFDs are traded over-the-counter (OTC), not traded on exchanges. There is no central marketplace for CFD trading, and prices vary from broker to broker. On the other hand, futures are traded on exchanges like the Chicago Mercantile Exchange (CME). It provides a more regulated environment and ensures that all participants have access to the same prices.

Contract price

Another key difference is how contracts are priced. The contract’s price is based on the underlying asset’s spot price when trading futures. It means that traders need to be aware of the asset’s current price to determine whether or not to enter into a contract. With CFDs, however, the contract’s price is based on the price of the underlying asset when the contract is opened, which means that traders do not need to be as concerned with the asset’s current price and can instead focus on predicting future price movements.

Leverage

CFDs offer much higher levels of leverage than futures contracts. It’s a way of borrowing money to increase your potential profits from a trade. However, it also increases your risk as you could owe more money than you have invested. Futures contracts are typically traded with leverage ranging from 2:1 to 5:1, while CFDs can be traded with leverage of up to 20:1.

Margin requirements

Margin requirements are the amount of money you need to deposit to open a position. When trading with CFDs, you only need to deposit a small percentage of the total value of your trade as a margin. It is known as margin trading, and it allows you to trade with more money than you have in your account. Futures contracts also allow you to trade with leverage, but the margin requirements are higher. For example, if you want to trade a contract worth $100,000 with 5:1 leverage, you need to deposit $20,000 as a margin.

Settlement

Another critical difference between CFDs and futures is how they are settled. Futures contracts are usually settled at the end of the trading day, meaning that any profits or losses are realized. CFDs, on the other hand, are settled in cash. It means that any profits or losses are realized immediately, which can be advantageous for traders who want to gain from short-term price movements.

Expiry dates

Futures contracts have set expiry dates, which must be traded before a specific date. The most common expiry dates for futures contracts are quarterly (three months), but some contracts also have monthly or annual expiries. CFDs do not have set expiry dates, meaning they can be held for as long as the trader wants. It can be advantageous for traders who want to take a longer-term view of the market.

Trading hours

The trading hours for futures contracts are usually shorter than those for CFDs. Futures contracts are only traded during regular market hours, while CFDs can be traded around the clock. It means that traders who want to take advantage of price movements outside of regular market hours can do so with CFDs.

Commission and fees

CFD trades are typically subject to commission fees, while futures trades are not. The commission is charged as a percentage of the total value of the trade, and it is paid to the broker when the trade is executed. Futures contracts are usually traded on exchanges, which charge transaction fees. These fees are usually much lower than commission fees charged by brokers.

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