When choosing between CFDs and futures contracts, the key difference is that CFDs are leveraged products while futures contracts are not. This means that investors interested in trading futures contracts should have a more extensive capital base than those interested in trading CFDs.
Both products have their advantages and disadvantages, meaning that the right choice will depend on your investment goals.
What are CFDs?
A contract for difference (CFD) is a popular form of derivative trading. CFDs were initially introduced in the early 1990s as a way for investors to trade shares without paying the total value of the underlying asset.
CFDs are traded on margin, meaning that you only need to put down a small deposit to open a position. This makes CFD trading an attractive proposition for many traders, and it allows them to gain exposure to larger markets with less capital than would be required to trade the underlying asset directly.
What are futures?
Futures contracts are another popular type of derivative instrument that allows traders to speculate on the future price of an underlying asset.
What are the differences between CFDs and futures?
You need to be aware of several key differences between CFDs and futures before you start trading. These include:
Margin requirements
When you trade CFDs, you only need to put down a small deposit, known as margin, to open a position. This allows you to gain exposure to larger markets with less capital than would be required if you were to trade the underlying asset directly. However, it is essential to remember that CFDs are a leveraged product, which means losses can exceed deposits.
When you trade futures, you must put down a margin deposit that is typically much larger than the margin required for CFDs. This is because futures contracts have a fixed expiry date, which means that you are liable for the contract’s total value when it expires.
Settlement
When you close a CFD position, you will receive or pay the difference between the opening and closing prices of the trade. This settlement process is known as “mark to market”, and it ensures that all CFD positions are closed out at the current market price.
When you close a futures contract, you will either receive or pay the difference between the opening and closing prices of the contract. However, this process is known as “final settlement”, and it only takes place at the contract’s expiration. This means that you may not receive or pay the total difference between the opening and closing prices if the market moves in your favour or against you after you have closed your position.
Expiry dates
CFDs do not have an expiry date, so you can hold a position open for as long as you like. Futures contracts, on the other hand, have a fixed expiry date. When you trade a future, you agree to buy or sell the underlying asset at a set price on a specific date in the future.
Price movements
CFDs are quoted in price-to-price terms, which means that the price of a CFD will change in line with the price of the underlying asset. On the other hand, futures contracts are quoted in terms of basis points. This means that the future price will change in line with the changes in the underlying asset’s yield.
Dividends
You will typically receive a dividend payment when you own an underlying asset that pays dividends even if you hold your position open overnight. This is not the case with CFDs and futures contracts, which do not pay dividends.
Costs
CFDs typically have lower costs than futures contracts. This is because futures contracts usually have a higher commission and bid-ask spread.
Bottom line
It is important to remember that CFDs are a leveraged product and that losses can exceed your original investment. Before you decide to trade CFDs or futures contracts, make sure you understand the risks involved and contact an experienced and reliable online broker from Saxo Bank.
