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The fundamental difference between CFD trading and futures is that futures are standardized, exchange-traded instruments with an agreed expiration date, while CFDs are less rigid, over-the-counter contracts that merely track price action.
However, when it is just a case of speculation on the direction of the markets, why would a trader find it more convenient to engage in strict public interactions, as opposed to adopting the flexibility in over-the-counter trading?
Both instruments are derivatives. That is, they enable you to participate in market movements without owning the underlying asset. Nonetheless, they vary in terms of market access, contract structure, holding costs, and complexity.
This guide provides an educational description of the differences between CFD trading and futures trading to help you understand how these tools operate, so you can determine which structure suits your objectives.
Note: The information below is purely educational and should not be taken as investment advice.
Quick Answer
Futures are exchange-traded contracts, which are of a standard and require a buyer or a seller to trade an asset at a fixed price and at a particular expiry date. On the other hand, CFDs (Contracts for Difference) are over-the-counter (OTC) contracts where you merely buy the price difference between the time the contract is opened and the time of its closure of an asset, and never actually own it. The fundamental differences include their point of entry, retention, leverage mechanism, and complexity as compared to the market beginners.
What Are Futures and What Is CFD Trading?
Futures are formal agreements which are bought and sold in public exchanges, where CFDs are private contracts executed directly with a broker.
Futures
A futures contract is a binding agreement between a firm and a counterparty to buy or sell an asset at a specified future date. When you trade futures, you enter into a contract with a centralized public exchange.
This trading is performed by the exchange as the intermediary, and a related clearinghouse secures the trade. Since these are publicly traded, the exchange determines the fixed contract sizes and the strict expiration dates required by all parties.
CFD
A CFD is an off-the-shelf contract that directly reflects the movement of a market.
A Contract for Difference is just what the name suggests: a contract to pay (or receive) the difference between the price of an asset at the time of the trade opening and at the time of the trade closing. The underlying asset is never owned. Instead, they are contracts issued by brokers and reflect only the live prices of world markets.
CFD vs Futures Trading: What’s the Core Difference?
The fundamental distinction is how and where such contracts are executed, which fundamentally alter market transparency and trading regulations.
Exchange-Traded vs OTC
Futures are traded on centralized public venues, whereas CFDs are traded directly between you and a broker over the counter.
Switching of trading alters all the aspects of execution and market regulations. Centralized exchanges provide complete transparency: everyone sees the same order book and volume data.
Recent statistics by the Futures Industry Association (FIA) have shown that over a billion contracts are processed every year through exchange-traded derivatives, which show an enormous centralized liquidity.
However, unlike OTC, a CFD structure means your broker is your counterparty in the transaction. As such, you are very much reliant on your broker’s internal liquidity and pricing models.
Standardization and Contract Specifications
Futures have preset, and sometimes large, contract sizes, while CFDs have very flexible positioning requirements.
Since the exchange standardizes futures, one contract for an item such as crude oil or gold represents a large quantity of the commodity.
This standardization is highly liquid but requires significant capital. CFDs, however, are flexible. Brokers make it possible to trade in fractions of standard sizes, allowing easy entry and exit of positions.
CFD vs Futures Trading Differences that Matter Most
The most significant differences concern expiry dates, margin requirements, and market operating hours.
Expiry and Rolling vs No Fixed Expiry
Futures have an ultimate expiry date and must be rolled over, whereas most CFDs have no expiry date at all.
There is a lifetime for every futures contract. When the expiry date is near, traders not wishing to receive physical delivery will have to close their position and open another one in the following month’s contract, which is called rolling.
CFDs are usually not subject to expiry dates. So long as you have enough margin, you can hold a CFD position open without the need to worry about the contract expiring.
Leverage and Margin Mechanics.
Both instruments involve leverage, though the exchange sets futures margin, and the broker sets CFD margin.
Leverage enables you to manage a larger size with a lower initial deposit, which is referred to as margin. Exchange calculates initial and maintenance margins in the futures market depending on market risk and volatility.
Your broker establishes the margin requirement in the CFD market. Although the essence is similar, the OTC nature of CFDs often results in margin requirements that differ from those under conventional exchange guidelines.
Liquidity and Market Hours
Futures have strict trading hours and distinct liquidity pools, whereas CFDs tend to be offered with more extended hours, almost round-the-clock.
There are certain opening and closing times for an exchange, which imply that futures liquidity is extremely concentrated during these regular sessions. CFDs are not subject to exchange bells as they are OTC products.
Several brokers offer more markets, allowing traders to read global news from anywhere in the world, regardless of their local time zone.
Costs and Holding Time: What Changes Between the Two?
Futures are subject to upfront exchange fees and rollover costs, whereas CFDs are usually subject to variable spreads and overnight financing charges.
Futures
The open exchange commission and the conceptual cost of rolling forward contracts are the main concerns of future traders.
When trading futures, expenses are typically open or prepaid. You submit a commission to your broker and a fee to the exchange in which the trade is executed.
If you hold a position spread across several contract months, you must also consider the spread and transaction costs of rolling the position forward.
CFDs
Investing in CFDs typically involves paying a spread and a daily overnight financing fee, which are applied over multiple days.
In contrast to futures, CFD brokers tend to earn their fee from the spread (the difference between the purchase and sale price) rather than a commission. Also, when you own a CFD until after the market closes, then you pay the overnight financing charge.
Futures and CFD trading are essential to consider when determining the type of holding. Also, CFDs may be expensive in a very long-term portfolio due to overnight charges, while futures may be less expensive to hold over multi-month periods.
Risk Profile: Which One Is More Complex for Beginners?
Both are risky instruments, but futures are highly complex with strict expiry regulations, while CFDs are highly risky due to unregulated leverage.
Futures Risks
Futures are subject to the risks associated with large standardized contract sizes, expiry dates, and the possibility of volatility amplification. A futures contract of the usual size is large, and a slight price change can cause a profound financial effect.
Beginners usually find it hard to cope with the inflexible time of expiry dates and the dynamics of rolling contracts. Moreover, these risks can be increased by the fact that fast-moving markets can rapidly consume an account’s margin if it is not managed correctly.
CFD Risks
The risks associated with CFDs focus on leverage amplification, overnight interest compounding, and gap risk in fast markets. Because CFDs can be highly sized flexibly, the barrier to entry is reduced, which can tempt beginners to over-leverage their accounts.
Earnings are magnified by leverage. On top of this, holding costs may also erode account balances simply through the passage of time. Gap risk also affects them; when a market closes and reopens with a large gap, a CFD position can lose heavily before a stop-loss order is triggered.
Use-Cases: When Traders Select Futures vs CFDs
Traders choose futures for standardized, long-term hedging, and CFDs for short-term, flexible speculation.
Futures and options trading are both commonly used for hedging, though options carry the right, not the obligation, to execute
Short-Term Directional Trading
Short-term directional trades are considered flexible by day traders and therefore find CFDs as ideal, whereas futures are centralized, which draws them to liquidity. Day traders and short-term speculators are often inclined towards CFDs because they can easily adjust their trade size to match their account balance.
The absence of expiry dates also reduces logistical pressure on quick trades. Traders who are sensitive to order book information and volume analysis, on the other hand, prefer the transparent, centralized liquidity pools available in futures markets.
Hedging Exposure
The two instruments are both applicable in terms of hedging against negative price swings within an existing physical or financial portfolio efficiently. In comparing futures trading and CFDs for hedging, the decision will depend on scale.
A large farm company could contract for futures months before wheat prices to hedge them, using the standardized protection provided by the exchange. Conversely, a single trader with a wide tech portfolio can open a short index CFD to hedge potential losses before unexpected economic news is announced.
According to ISDA OTC derivative reports, the extent to which OTC structures are used worldwide to manage risks in a customized manner is very significant.
Practical Checklist Before Choosing Either Instrument
Before investing in a given derivative instrument, evaluate your capital, risk level, and trading frequency.
- Access and eligibility: Do you want to trade exchange data feed, or would you prefer a single broker?
- Capital requirements: Does your account have a large margin requirements of standard futures, or does that require the micro-sizing of CFDs?
- Preference of holding period: Do you hold a position for months (preferring futures), or just days (preferring CFDs)?
- Familiarity with expiry and rollovers: Can you handle contract expiry dates and rollover expenses?
- Risk management knowledge: Do you have hard stop-loss policies to control the leverage contained in the two systems?
To learn more about market mechanics, you may look through the recent educational materials on the STARTRADER blog to get some background information.
FAQs
The primary distinction is structure. Futures are standard contracts which are listed in the stock markets with a pre-determined expiry date. CFDs on the other hand are not listed, or are private contracts between you and a broker that follow the price of an asset without an expiry date.
Yes. Each futures contract has a particular date of settlement and expiry. The majority of CFDs do not have expiration dates, and you are free to leave the position as long as you have the required margin to maintain it and pay the overnight fees.
Both have leverage, but are regulated differently. The exchange has standardized future leverage through its margin rules. The leverage provided by a CFD is calculated using the broker’s and local regulatory limits, which may occasionally allow a higher leverage ratio for a smaller account size.
Neither instrument is necessarily safer. Futures are more transparent due to centralized exchanges, but they are highly risky for financial transactions because of their large contract sizes. CFDs have smaller trade sizes, but they involve counterparty risk and overnight costs that compound. Your risk management strategy is your only savior.
Conclusion
Neither instrument is better than the other; it comes down to the appropriate adjustment of the instrument to your goals, the amount of money you have, and your risk tolerance.
If you would like to trade exchange volume and intend to make long-term trades, futures would be more appropriate.
CFDs might better suit your strategy if you place a strong emphasis on flexible position sizing and short-term directional trading.
It should be noted that this information is not investment advice but somewhat educational. You may wish to test your strategies in a simulated environment.
Disclaimer: No representation is given, warranty made or responsibility taken about the accuracy, timeliness or completeness of information sourced from third parties. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate having regard to your particular circumstances.
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