CFDs vs Futures: Which Is Better?

CFDs and Futures are popular investment instruments that allow people to buy and sell assets with controlled risk easily. However, many investors are lost in differentiating CFDs trading and investing in futures. This article explores the distinction between contracts for difference and futures trading to give you a better understanding.

!! Futures and CFDs are similar products, that are both derivatives, meaning they are contracts for "buying and selling markets". Both of them are leveraged trading. You must carefully control the position and avoid excessive leverage. It is not recommended for novice investors.

CFDs

A contract for difference (CFD) is a financial derivative instrument in which  the differences between open and closing trade prices determine the position’s profit. The investor doesn't have ownership of the physical good, product, or security.

Investors can trade CFDs in almost all investment markets. Leading brokers globally provide investors with contracts for differences in currencies, cryptocurrencies, sovereign debt, indices, and metals such as gold and silver.

The value of a contract for difference is determined by the difference between a trade's opening and closing price, not ownership of the underlying asset.Therefore, you make money when you buy low and sell at a higher price, and vice versa.

Usually, when you go long or buy a currency pair, you speculate the price will go up. This means you will sell at a higher price. On the other hand, when you open a short position, you believe that the price will go down.

Example: Imagine you believe that the value of the Euro (EUR) will increase against the US Dollar (USD). You decide to buy the EUR/USD currency pair at a price of 1.1000. This means you are going long on EUR/USD. If the price of EUR/USD rises to 1.1200, you can sell your position at this higher price, making a profit from the increase.

Futures

A Futures contract is an agreement between two or more parties to purchase or sell an asset at a specific price on a set date in the future.The term "Future" refers to the future execution of the contract.  Speculators, mutual funds, and portfolio managers trade futures contracts to anticipate price movements on an underlying asset in the future.

Futures contracts are presented in markets such as commodities, agricultural goods, energies, currencies, and indices.

Think about future oil contracts. Over the next year, crude producers will set prices for oil barrels. As a result,  any oil contract lasts 12 months. As such, they guarantee prices, production, and budgets.

Traders don't need the real goods to buy and sell futures contracts. Futures contracts generate profits or losses from the difference between the opening and closing prices, as is the case with CFDs.. However, traders must close the position before the expiration date.

Example:

Let's take an oil futures contract as an example. An investor purchases a December contract at $60 per barrel, which goes up to $70 due to geopolitical tensions in the Middle East. The trader sells the contract for $70 per barrel and makes 10 dollars per unit. Easy cake!

Even though CFDs have a lot of common features compared to futures, they are still two different financial instruments. Here are a few key comparisons:

Here are some of the main highlighted differences between CFDs and futures:

2.1. Differences in contract specifications: CFDs are more flexible

CFDs have no physical delivery and no expiry date issues. CFDs typically require less margin, so the leverage is greater, and the contract size and amount will be more flexible. Mitrade provides leverage from 1 to 200X on global markets, the minimum contract size is from 0.01, so you can set up your orders easily on your own.

2.2. Differences in fees: CFDs are suitable for short- and medium-term, while futures are suitable for long-term holding

• Futures fees: commissions, taxes (usually low), spreads (very tiny)

• CFD Fees: Spreads, Swap Fees

If you simply compare the cost, CFDs are higher than futures. Use futures if your funds are sufficient and you plan to hold the strategy for a long time CFDs are more suitable for short-term strategies, like day trading, and scalp trading.

Choosing between CFDs or futures contracts shouldn't be complicated. You only need to consider the features of each and choose an instrument that suits you.

Here is an example. While CFDs are traded in brokerages such as MiTrade, the transactions of futures contracts take place on exchange venues.

Overall, futures are more structured instruments that offer less flexibility. They respond to specific prices and real market flows, such as demand. Furthermore, futures provide centralized products in specific locations or channels.

On the other hand, CFDs are more flexible and allow you to trade the same size of futures contracts with less money. Also, with CFDs, you can keep your trade open as long as you want. The opposite is true with futures, where you should close your contract before the expiration date.

Another big difference between CFDs and futures is that futures contracts have significantly wider spreads. Also, futures work with bigger contract sizes. In contrast, CFDs allow more leverage.

CFDs can trade almost any commodities, including forex, commodities, stocks, indices, cryptocurrencies, and more. Futures are mainly traded on commodities.

• Indices (S&P500, Index): CFDs and futures are available

  
  

• Commodities (gold, crude oil, etc.): CFDs and futures are available

  
  

• Forex: mainly CFDs

  
  

• Stocks and ETFs: futures or CFDs can be traded, but if you don't use leverage, choosing a stock broker is better.

  
  

• Cryptocurrency: Only CFDs are available

CFDs and futures are both financial derivatives used for trading, but they have key differences. CFDs allow traders to speculate on the price movements of various assets without actually owning them, offering flexibility and the ability to use leverage. 

However, they often come with higher spreads and overnight fees. On the other hand, futures are standardized contracts that obligate the buyer to purchase, or the seller to sell, an asset at a predetermined price on a specified date in the future. These contracts are traded on exchanges and require a margin, making them more structured and subject to regulatory oversight. 

In summary, CFDs provide more accessibility and flexibility, while futures offer a more regulated trading environment.

#What type of trader is best suited for CFDs?

CFDs are often favored by short-term traders and those looking for flexibility, including day traders and scalpers. They are also suitable for traders who want to exploit price movements without the obligation of owning the underlying asset.

#How are profits calculated differently for CFDs and futures?

We calculate profits for CFDs by multiplying the difference between the contract's opening and closing prices by the number of units traded. For Future, the change in the contract price at expiration determines profits . This can lead to different cash flow dynamics and margin requirements for each type of trade.

#Are there any significant risks associated with trading CFDs?

Yes, CFDs come with risks such as high volatility, the potential for significant losses due to leverage, and the possibility of overnight fees. It’s essential for traders to manage their risk carefully and understand the terms of their contracts.

# How do futures contracts differ in terms of expiration?

Futures contracts have specific expiration dates, meaning they must be settled or rolled over by that date. This can affect trading strategies, as traders need to be aware of these dates and manage their positions accordingly. In contrast, CFDs can be held indefinitely until the trader decides to close the position.