CFD or Contract for difference and futures are commonly mixed up terminologies for a novice investor. Overall, both these financial instruments appear the same, but there are differences between CFD and Futures. These financial instruments are from the derivative family and allow investors with margin trading, for experienced investors prefer futures, whereas, for a new investor, the CFDs may be more appealing. Futures can only be traded on the market exchange, whereas CFDs are traded between the investor and the broker. CFDs can easily be closed and en-cashed than the futures.
Now, let us get to know what CFD Futures and CFDs are in detail.
Part 1: What are CFD Futures?
As per new investing concepts, CFD and Futures are the latest ways of investment. Now you trade in a variety of instruments like stocks, metals, currency, indexes, etc. CFD Futures trading and trading in futures in the market have a common similarity. The investor has to take a call on the price of the asset while trading in CFD Futures.
Futures are regular agreements in which an investor has to purchase or sell an asset at a pre-defined price and has an expiry validity in the future. CFD Futures don’t have an expiry and are short-term contracts between trader and broker.
Part 2: What is the difference between CFD and futures?
In this section, let us learn the difference between CFD and Futures.
CFDS are short-term contracts entered into by the trader with his broker on the difference in the opening and closing cost of an asset class in the market. In this, you don’t need to take delivery of the asset your trade-in. You can buy the asset when the price rises or sell it when the market is going down. The profit is the difference in the price when the market opens and closes for a particular asset multiplied by the quantity of the asset you purchase.
Futures are agreements between investor and seller for an assets class a given financial instrument at a definite price and expiry date. Futures are agreements entered into by the buyer and seller with an impulse to purchase or trade the asset at a set price and have to be implemented contract validity gets over.
Futures are used to hedge your position and safeguard yourself against fluctuations in the asset price. For example, the foreign investor may hedge his stake on the rate of USD or Euro while investing in overseas exchange to safeguard against fluctuations in the forex market.
Individual investors or large FII’s can trade in futures on the market under regulatory authority. The price of the futures is on the asset class on the market. CFDs are speculative, and their price varies depending on the broker and the booking platform.
As an investor, if you are in the habit of buying a large number of assets, then futures trading is more cost-effective. Also, since futures are traded on exchanges, the overall cost of the transaction is cost-competitive.
5. Futures are less liquid
Another CFD Futures difference is that CFDs are agreements entered by the investor with his broker in a short time range. These are speculations on the change in the price of an asset. As a result, the CFDs are liquid easy for profit booking. Futures are bought or sold at set prices hence less liquid. In CFD trading, you can decide the amount you want to trade and book the requisite profit on the transaction. CFD can be bought using margin money.
CFD trading Futures have a pre-set validity. The value of the trade lowers as the validity comes to closure. They are less flexible. In CFD investing, the Contract’s validity is from the opening call to the closing call position. You can prolong the Contract till the account balance is maintained.
7. Entry barrier
Futures are a costly proposition for small investors due to the additional charges built into trading in them. They are not flexible in terms of the transaction. Buying a CFD is similar to purchasing a share. For futures trading, you need upfront money, whereas CFD can be traded using margin or leverage. In the Futures, an investor takes fixed calls as per definite investing strategies. In CFD, the investor can speculate on the price of the asset in real-time.
8. Opening account
CFDs offer traders much easier options and facilities while opening an account to trade them than opening an account for futures. The reason behind it is that there are fewer regulation traders will find surrounding Contracts for Difference (CFD). CFD also allows traders to start their trading with much less capital.
9. Expiration date
The CFDs allow leverage like the future option does but a CFD doesn’t hold any expiration date. Indefinitely traders are allowed to extend it. That’s why the exchange of CFD takes place in an unregulated market. It indicates that traders may have any problem with your broker.
Several top-tiers or popular financial authorities regulate the future market. On the other hand, CFDs are not under any regulator.
11. Dispose of good
As it is a financial product purely, it is not mandatory or required to dispose of the good. With Futures trading, a CFD can apply to access several financial assets, including currencies, indices, raw materials, stocks, agricultural products, etc.
Part 3: Some FAQs
1 – Why is CFD banned in the U.S.?
In the U.S., all traded financial instruments have to be regulated by their Securities & Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC ). Since CFDs are over-the-counter products, any of these U.S. regulators do not regulate them. Also, CFDs are not traded directly on the exchange. Hence CFDs trading is illegal and is banned in the U.S.
Over the counter, trading is banned in U.S. markets as such financial instruments are not adequately regulated. CFDs are outside the purview of regulatory compliance and cannot be monitored by their SEC or CFTC. As a result, CFDs are illegal to trade in the U.S.
2 – Does CFD give more leverage than futures?
CFD is more popular with novice investors due to its lower initial amount required. Margin trading is possible in both futures and CFDs. With little upfront money, an investor can start trading in CFD and Futures.
3 – How do you make money with CFD?
CFD is a speculative and leveraged instrument. The profit you make is directly proportional to how close your call is to the real price of the asset. If the price rises, the money you also make increases.
Once you have read this article, you can master the investment strategy of CFD Futures trading. This article also sheds light on the benefits of CFD and Futures trading. A new investor can use all this information to earn profits by trading in these new-age assets.