CFDs vs Futures
CFDs and Futures trading are both forms of derivatives trading. A futures contract is an agreement to buy or sell the underlying asset at a set price at a set date in the future, regardless of how the price changes in the meanwhile. Expiry dates apply to futures because this represents the date at which the asset has to be delivered at the agreed price under the terms of the contract. Commodities, stocks and currencies are examples of markets that offer both CFD and Futures trading. Since futures are interchangeable transactions, many traders or speculators who never intend to take delivery of the asset can buy and sell future contracts to profit from price movements in the market. This can be done by taking the opposite position of an existing open position before the expiry date. This is known as offsetting. Conversely, a contract for difference has no set future price or no future date. You just contract to pay or receive the difference between the price of the underlying asset at the start of the contract and the price it ends up at when you decide to liquidate the contract and take profits/losses.
One important difference between the two is that futures trading is conducted in a centralized open market where all participants can see trades, quotes and rates. Investors have a wider choice of instruments in futures markets, so there are more opportunities to hedge positions in relation to CFD markets. CFD trading, on the other hand, is conducted through a broker, who is the counterparty to the trade. In futures trading, the broker is simply an intermediary. In CFD trading, the broker is the effective counterparty to the transaction and quotes the prices for both of the parties in the trade. This is a disadvantage as compared to futures markets, as the broker who is the intermediary between buyer and seller can manipulate prices on both sides to their benefit.
Spreads are also much bigger in CFD trading in relation to future trading. However, the fees and commission charged by firms is lower in CDF trading than in futures trading. Both are leveraged products, but futures accounts require higher margins as trades will be executed with a larger amount of capital.
Further differences can be found in terms of expiry date, liquidity and financing. Futures are the most liquid way to trade commodities and traders who want to trade large amounts will find the futures market more beneficial. This means that futures trading requires larger sizes of contracts and these contracts are designed to be used by investment banks and other institutions. For example, you could trade five ounces of Platinum with less capital using CFDs, while a single futures contract for Platinum represents 100 ounces of Platinum. Therefore, the initial capital outlay for Futures is a lot higher due to the standard contract sizes and the big influential players in this market.
As with options, successful trades using futures contracts require you to correctly identify the price direction and the timing of this movement, whereas with CFDs, the trader can analyse the direction without the time constraints imposed on derivatives such as futures and options.
