For a trader whose preference is shortlisted to Futures and CFD trading, a knowledge on the difference between the two instruments would be helpful to successfully pick a trade that matches someone’s trading personality. But because CFDs and Futures are both forms of derivatives, novices would often interchange the market behaviour of each instrument. In this post, we aim to orient you on the main differences of the abovementioned commodities with a hope that the details which we are about to share will help you decide where to invest.
Main Differences Between CFD and Futures
CFDs
1.CFDs are usually dealt with brokers
2.CFD orders are easier to transact in the market and they usually have less conditions for entry.
- Spreads are more costly for CFDs but commissions and other broker charges for CFD is less than other markets.
- CFDs are flexible commodities, they can be traded virtually with other commodities such as markets, including indexes, stocks, commodities, currencies, etc.
- Because of its flexibility, CFDs are also convenient for multiple trading because you could use a single account to transact in other markets.
- CFD offers less hassle in opening an account.
- Interest for CFDs are charged on a daily basis.
Futures
1.Futures are usually traded on stock exchanges.
2.Similar to other derivatives, a contract for futures focuses on the agreement to buy or sell the underlying asset at a fixed price on a certain date in the future, regardless of how the price changes in the meantime.
- Futures have an expiration date, this date is known as the exact moment when the asset is going to be dealt between the trader and the broker.
- Futures transactions can be interchanged. Thus many traders or speculators who do not wish to receive the delivery of the asset can buy and sell the contracts in order to profit from the fluctuations.
- Compensation can be performed in futures trading. Compensation is taking the opposite position of an existing open position prior to the expiry of the contract.
- Futures trade occurs in a centralized open market where all participants can see exchanges, quotes and rates.
- Brokers act as mediators
- Contract sizes are negotiated during a futures trading session.
9.Futures are designed to be exchanged in big exchanges.
10.It naturally has a high minimum commitment for traders because this instrument is utilized by banks and other institutions.
What makes CFD and Futures Confusing?
The nature of Futures and CFD Trading being a derivatives trade makes it a quite confusing instrument for traders. They have similarities which are very evident.
1.Both instruments are traded via leverage
- They both involve brokers in the transaction. Thus,it could be an avenue where they can take advantage of your money.
Conclusion
No matter how similar these two instruments in terms of their form, we can still see that they are distinct instruments. They both post risks when mishandled so it would be advantageous for a trader to think wisely before leaping into the trade.