Contracts for difference and futures are often a point difference between forex and cfds confusion for new traders, because in essence they seem to be reasonably similar products. Of course, both are derivatives, and both provide much the same leverage benefits that are common across derivatives generally.
However, that’s not to say there are instances where futures might be more suitable than CFDs, and vice versa. They work in much the same way as contracts for difference, because traders take a position on future prices based on today’s price point. If prices rise in future, the futures price will rise and so the instruments can be resold or executed on the expiry date in order to reap the maximum reward. The futures markets are however almost entirely transparent, tracking the underlying market more closely than any CFD broker ever will. Furthermore, many CFD brokers use the futures market as the basis for setting their prices, only to further handicap traders against the most likely outcomes. Futures are bought for much the same reasons as CFDs are bought.
The major distinction lies in the technical differences between the two instruments. Futures are traded on exchanges, which means market-established prices, versus broker established prices with CFDs. This guarantees that there will be more price integrity when trading futures as compared with CFDs, although that comes with the various restrictions of futures contracts over CFDs. Advantages vs CFDs More Price Transparency: Futures are traded on open, public exchanges, and are bought and sold by a range of different investor types and institutions. As a result, they are traded in an essentially large, moderately liquid market, which means prices tend to more closely reflect the value of the futures contract and the underlying asset at hand. More Cost Effective For High Quantity Trades: because of the nature of the commission structure, futures contracts are often more cost effective for traders looking to trade in substantial volumes. Generally designed for more serious scale investors, futures offer a significant saving on the transactional costs associated with trading the markets, and as such represent a more cost-efficient way of doing business to yield often largely similar results.
Disadvantages vs CFDs Less Liquidity Than Broker CFDs: because CFDs are largely traded directly with the broker, it is commonplace for the CFD broker to act as the market maker in situations where positions cannot be directly matched. This has the effect of making CFDs generally much more liquid than futures, which in themselves are a reasonably liquid derivative. Expiration Date: the expiration date attached to futures serves to build in price decay, whereby the value of the futures contract is gradually eroded, all things being equal, the closer we get towards the expiry date. Barriers To Entry: futures contracts are often prohibitively expensive for smaller traders to invest in, because of the rigid size of the contracts involved.
While one CFD is usually equal to one share, that definitely isn’t the case with futures, and traders will often be required to fund a hefty amount of capital upfront in order to acquire an interest in the market. Independent Investor is a news and educational portal covering latest events in the world of trading and investment. Our team of dedicated writers work hard to bring the facts to our readers on a daily basis. Information on this website is for informative purposes only. Jump to navigation Jump to search “CFDs” redirects here. CFDs are available in Australia, Austria, Canada, Cyprus, Czech Republic, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand.