CFD Trading vs. Futures Trading: Key Differences Explained

CFD trading and futures trading are two popular ways through which market speculators try to predict price movement of different types of assets. Comparatively, although they have some similarities, they also possess key differences, which can influence a trader’s strategy as well as risk exposure in trading. Understanding these differences is essential for anyone looking to choose between the two methods of trading.

A derivative called Contract for Difference or trading in CFD allows you to speculate on the price movement of an underlying asset without actually holding the asset. You enter into agreement with the CFDs broker to agree to merely swap the difference of the asset price from when you open the position to when you close the position. This is highly liquid; you can either go long or short on an asset. This type of trade also allows the trading of a wide array of other instruments, such as stocks and commodities, indices, and forex.

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The other is futures trading, whereby one buys or sells a standardized contract with an agreement to deliver an asset at some future date at an agreed-upon price. Unlike CFDs, futures contracts are often exchanged among traders. For most futures contracts, the trader is either obligated to take delivery of the asset or settle the contract by expiration. Futures contracts are mainly used for hedging or speculation in commodity, stock index, and currency markets.

Margins and leverage constitute the biggest difference between CFD trading and futures trading. Both markets permit leverage-which means more can be controlled with a smaller original investment-but in futures trading, the leverage is usually very high, which means both rewards and risks are magnified and increased as well. The second distinguishing factor is the duration of the positions. With CFD trading, one is not required to have any of these positions expire at any given time; hence a trader can hold positions for as long as they like.

Leverage depends on the policies adopted by brokers and on the type of asset one intends to trade. Usually, in CFD trading, it happens to be lower than that adopted by futures trading. Therefore, CFDs offer greater flexibility even to the short-term trader as well as to the long-term investor. Futures contracts are prone to expire. This would mean either having to close a trader’s position prior to the contract actually expiring or rolling over the contract to a later date if the trader wants to continue trading in the futures markets. This time constraint could then impact decisions that a trader might make with respect to futures markets.

Generally speaking, CFD trading incurs spreads – the difference between buy and selling prices – and sometimes a commission charge from the broker. Also, depending on the broker, finance charges apply when the position is held overnight. Futures contracts, for example, may charge commission fees per contract, and the cost of holding a position will vary from one type of contract to another, and also from one exchange to another.

Both CFD trading and futures trading can make profits from price movements, but the contract’s nature, margin requirement, position duration, costs, and costs may play a role in determining which one better serves their purposes. Such distinctions are known to a wise trader to make informed decisions, depending upon his or her risk tolerance, style of trading, and even the asset to be traded. Whether you decide to use CFD trading or futures trading would depend on your personal preferences and strategy.