Beginners always get confused about futures and contract for difference (CFD) solely due to the vast similarities between the two financial assets. Although Futures and contracts for difference are financial products and they have similar benefits when leveraged, there are scenarios in which trading one of them is reasonable. The financing and volatility of the two products differentiate them from one another.
Traders can enter a market at a lower value during CFD trading than when trading in the future. Also, to trade contract of difference, a broker needs to interact, but futures require trading on an exchange. This guide will provide insights on what to trade between the two financial derivatives, their similarities and differences.
Meaning of Contract for Differences (CFDs)?
Traders can predict and presume the direction the value of an asset will go either it will increase or decrease over a period. Such type of trading is known as contract for differences (CFDs). The investor’s profit depends on the disparity before commencing and after closing the trade. The physical asset is not in possession of the traders therefore, they can only trade on their change in valuation. CFD trading is possible on multiple platforms and its availability can be as indices, shares, bonds, cryptocurrencies, and precious elements.
Meaning of Futures Trading?
A contract that involves selling or purchasing financial products in the future at a unique value based on the agreements of more than one party is known as Futures trading. As the name implies, the trade will occur in the future but will be set after reaching an agreement. Like CFD trading, it also involves predicting and speculating the asset’s value and then placing the market order for future execution. Commodities, agricultural products, currencies, indices, and oils are some of the products tradable on futures.
Ways of Trading Contract for Differences (CFDs)
The disparity between the value of the product when the market opens and closes will determine the CFD’s value. Traders make profits by selling high after buying low, and will not be in possession of the real asset. Opening a long or short position is possible with CFD trading, and in this case, traders open a short position after making predictions that they will make profits later come true. When a trader opens a long position, the same thing is applicable.
Ways of Trading Future Contracts
There are similarities in the way of trading futures and CFD trading since both do not require having the real products before purchasing or selling their differences in contracts. The main difference in the trading between the two is that the trader needs to close the trade before the future contracts reach their expiry date. If there is an increase in the asset valuation as the trader predicted, then profit is made. However, the trader risks losing the investment if the expiry date reaches and the trader is yet to close the position.
Selecting the Best Financial Derivative to Trade between Futures and CFDs on Futures
When considering whether to trade Futures or CFDs on Futures, the features of the two assets can help with the decision-making. Some of the features include:
- Traders that want to open a position with a small amount of money need to trade contract of difference since it offers more flexibility compared to a structured futures contract.
- When trading futures, traders need to close their position before the set date expires, but CFDs allow the opening of position for as long as possible.
- The spread of futures is wider than contract of difference which work with a smaller contract size than futures.
Futures allow less leverage, unlike contracts for differences.
Final Thought
Future trading and CFD trading on futures are two investment opportunities with similar trading strategies. However, traders trade Futures on an exchange, whereas CFD trading only requires an agreement with a broker. Thus, trading futures will be the best decision for a trader that prefers structured trading assets. But, if the trader cares about flexibility, then trading contracts of difference on Futures will be the better option. Therefore, the best contracts to trade depend on the profile of the traders.
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