subject: Guidance On Contracts For Difference vs Futures Trading [print this page] Guidance On Contracts For Difference vs Futures Trading
Whether it is CFDs that is contracts for difference or futures, the truth is that they are leveraged products and are placed in the derivative class of financial products. The term derivative essentially means that its price hails from the price of the actual and that underlying might be anything from stocks to commodities to bonds.
Due to the leverage element of CFD trading and futures, there is a feeling that they're highly risky to trade in even though that is true to some great extent, the manner and purpose for which they are used often determines the outcome. On the flip side, these items can also make handsome gains for you personally in a relatively short period of time.
So should you trade CFDs or trade futures?
Well, the essential difference between both is the tenure of the contract. In futures, you possess an expiry date and positions need to be squared up on on that day. CFDs on the other hand have no expiry date and also the moment you decide to get out of a position, you need to pay up or get the benefit of the main difference.
Another difference is the possibility of trade slip ups in the futures segment. As you have a buyer and seller for each future contract, liquidity can become an issue. CFDs on the other hand are traded with the CFD broker plus they are normally those who make the market. It may be argued that this gives them the chance to manipulate the market but since that isn't something a broker can sustain during a period of time and with growing competition, it's not in the interest from the CFD broker to manipulate the market.
Futures contracts have specific lot sizes and there's no flexibility. Opening a merchant account for futures trading also offers more regulatory procedures. CFD lot sizes are flexible and you can also trade CFDs in a variety of underlying assets like currencies, commodities, bonds and so forth. It is also simpler to open a CFD trading account as the regulations aren't as intense and you also need far less capital.
Since both futures and CFDs are leveraged, the margin money will be charged interest by the broker. Regarding CFDs, the interest is not as high as futures and traders also tend to get out of positions quickly.
To summarize, CFDs are more popular due to the above advantages.
