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The Differences and Similarities Between CFDs and Futures

In online trading, there are two main types of instruments for trading derivatives: CFDs and futures. Both instruments share some basic characteristics:

  1. They are derivative products, which means that, unlike spot operations, when trading these instruments, you are not buying or selling an asset. By investing in derivatives on a certain asset, you are speculating about the direction in which the price of that asset will move.
  2. This means that, in both cases, it will be possible to make a profit, whether the price of that asset rises or falls.
  3. They allow leverage, which means that it is possible to operate with more money than is available.

Despite this, both products have their particular characteristics. These particularities make each of them appropriate for certain trading operations.

CFDs

CFD stands for Contract for Difference. It is a contract whereby two parties agree to exchange the difference between the entry price and the exit price of the underlying asset on which the CFD has been established. If the trader believes that the asset’s price will rise, he will buy CFDs. Conversely, if he believes that the price will fall, he will sell CFDs.

The number of different underlying assets on which CFDs can be bought or sold is enormous. 

It is possible to trade online with CFDs of:

  • Stock indices.
  • Values
  • Commodities: gold, oil, metals
  • Currency pairs
  • cryptocurrencies

Where to trade CFDs?

Basically, CFDs are offered by online brokers and financial intermediaries who create these products to offer to their clients.

Futures

CFDs allow you to invest and speculate on the direction of an asset’s price without a defined term. Meanwhile, a future is a contract by which an asset’s purchase or sale is agreed at a future date and for a specific price.

Like CFDs, futures can be traded on many financial assets such as forex, stocks, stock indices, or commodities.

However, the availability of these assets is not as great as in the case of CFDs. 

On the other hand, futures are the most widely used instrument when investing in the world’s leading stock exchange indices.

Where to trade futures?

Futures are traded on official and regulated markets, very similar to stock markets.

The futures price evolves with the underlying asset price on the spot market. The difference between the price of the future and that of the spot market is usually an indicator that anticipates the direction of the cash asset price movement.

Price and commissions

Typically, the daily commissions for futures tend to be cheaper than for CFDs, especially index futures. Financial interests are implicit in the futures price. However, in CFDs, the financial interest paid when a contract is purchased is paid separately and is usually higher than that which would be paid with an equivalent future.

Of course, on the other hand, futures have much higher opening rates and initial capital requirements.

Liquidity and spread

In terms of liquidity, except for index futures, futures contracts are much less liquid than CFDs. This lack of liquidity can make it difficult to close a futures trade before it expires and translates into much higher spreads. This difference in a spread can offset the higher price and commissions of the CFDs.

Trade size

Futures require a much higher initial capital than CFDs and therefore do not suit small-scale or short-term trading.

So while futures trading can be cheaper than CFDs, you need to trade capital-intensive and longer-term. This limits the possibilities of trading futures to small to medium-sized traders.

Diversification

It is necessary to have the possibility of investing in a wide range of assets to achieve a diversified portfolio and to have the flexibility to vary the size of the investment in each asset at a reasonable cost.

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