There are many ways traders trade financial assets, but the two most famous ways are futures and contract for difference (CFD). Both financial assets have similarities which is usually a cause for confusion among newbies in the trading industry. Future is tradable on an exchange, whereas trading CFD requires interacting with the broker. In this guide, traders will learn how to differentiate CFD trading from futures.
Meaning of CFDs
Traders can predict and speculate the movement of an asset and make gains when the movement of the market is in the predicted direction. This is known as a contract for difference. The trader’s gain depends on the difference before and after closing the trade. CFD is tradable on multiple trading platforms and can be available in the form of shares, bonds, cryptocurrencies, indices, and precious metals.
The disparity between the product’s value when the market opens and closes will determine the CFD value. Traders profit by selling high after buying low and will not own the real asset. Opening a long or short position is possible with CFD trading, and in this case, traders open a short position after making predictions that they will make profits, which it later come true. When a trader opens a long position, the same thing is applicable.
Meaning of Futures
A contract that involves selling or buying financial products in the future at a unique value based on the agreements of more than one party is known as the future. As the name implies, the trade will occur in the future but will be set after reaching an agreement. Like CFDs, it also involves predicting and speculating what the asset’s value will be in the future and then setting the market order for future execution. Futures trading is available on the markets as follows:
- Agricultural products
There are similarities in futures and CFD trading since both do not require having real products before purchasing or selling their differences in contracts. The main difference in the trading between the two is that the trader needs to close the trade before the future contracts reach their expiry date. If there is an increase in the asset valuation as the trader predicted, then profit is made. However, the trader risks losing the investment if the expiry date reaches and the trader is yet to close the position.
What Differentiates CFD Trading from Futures?
Investors that trade either futures or CFDs do so due to the disparity between the financial assets. The differences between CFD Trading and Futures can be categorized into three, and they include:
The disparity between purchasing and selling price of a product is known as the spread. The spreads reduce when the market volume is high, whereas when the volume is low, the spreads rise. CFD trading requires the investor to make a single spread payment, unlike futures trading, which requires the trader to pay the broker a fee and a futures trading platform.
The duration with which the trader holds on to an asset is known as the holding period, and one year is usually the duration for holding a contract for difference. Once the market closes for a day and the traders are yet to offload their assets, they are charged a holding fee. This continues every day until traders trade their assets, thus making CFDs contract short-term. However, futures traders do not get charged fees for holding their assets since there is an expiration date. Thus, during futures trade, position holding is a common phenomenon among the traders until the expiration of the contract.
Traders need to pay a fee for not closing their positions during CFD trading since there is no expiry date. There is a limit to how a position can stay open during futures trade which is why there is usually an expiry date for every market. CFD positions can be opened for a long time, which is one of its benefits.
Although when leveraged the benefits of CFD and futures are alike, there are scenarios in which the reasonable thing to do is to trade one of them. However, traders trade futures on an exchange, whereas CFD trading only requires an agreement with a broker. During CFD trading, you don’t have to worry about a position closing, unlike futures trading with an expiry date.