Cash CFDs vs futures

Lesson 1 of 2

Contract types explained

Some traders like to capitalise on the briefest intraday market moves. Others prefer to wait for a trend to play out over a period of weeks or even months – and most of us fall somewhere in between. But many traders don’t realise that there are different contract types available to support these varying strategies.

Choosing the right kind of contract will help you minimise the charges you pay, and so protect your capital. The costs in question here are:

  • Overnight funding
  • Spread

Let’s have a look at how they apply to cash CFDs in comparison with futures CFDs.

Cash CFDs

Cash CFDs are positions that remains open until you decide to close them – they don’t have a fixed expiry date.

With these contracts you’ll see tighter spreads but higher overnight funding costs.

That means cash CFDs are cheaper to open than futures, in terms of spread. But if you use them for a trade that runs for a few days, overnight funding costs can start to mount up.

For that reason, these contracts are ideal for intraday positions or short-term overnight trades.

Forwards

As the names suggest, these are positions with a fixed expiry date at some point in the future. Unlike cash CFDs, futures CFDs are only available for indices and commodities.

These contracts have wider opening spreads, but their overnight funding costs are lower, and are built into the price.

So although futures CFDs are more expensive to open than cash CFDs, their reduced overnight costs make them cheaper to hold over time.

This means futures CFDs are ideal for longer-term trades.

You do need to pay attention to the expiry date on these contracts, though. If you’re planning to hold your position beyond this date, you’ll need to factor in the cost of rolling over to a new contract and paying the spread again. You should also be sure to have rollover instructions set up. You can do this in the ‘settings’ tab in My IG.

How do the costs compare?

To illustrate the difference between these contracts, here are a few examples of our minimum spreads for popular indices:

Minimum spreads
Cash CFDs Futures
FTSE 100 1 4
Wall Street 2.4 6
Germany 40 1.2 6
Australia 200 1 3

For cash CFDs, we charge overnight funding when you hold your position past 10pm UK time and for stock index contracts denominated in Australian dollars the overnight funding will be charged if you hold your position past 16.50 (Sydney time). Depending on the market you’re trading, we apply different formulas to make an interest adjustment on your account, reflecting the cost of funding your position.

As mentioned, the overnight funding costs for futures CFDs are all built into the price.

What’s the impact of choosing the wrong contract?

Suppose you use a future CFD to make a short-term trade. It’s unlikely there’ll be enough time for your savings on overnight funding to offset the initial spread before you close the position. This type of contract is designed to be held for longer, when the lower overnight funding costs will more than compensate for the wider opening spread.

On the other hand, if you decide to use a cash CFD for a long-term trade, the advantage you gain from the tight opening spread will gradually be wiped out as you accumulate higher overnight funding charges. This type of contract is designed to give you lower overall costs on positions that you close within a short time.

Example

Say you decide to buy on standard cash CFD on our FTSE 100 (equivalent to £10 per point). You open the position during market hours, when our minimum spread of one point applies. You hold it open for two nights, and the closing price on both evenings is 6000.

To calculate our overnight funding charge for indices, the formula is:

Nights held x (market closing price x trade size x (admin fee +/- adjusted ARR)) / 365

Our admin fee is 2.5% for standard CFD contracts, and 3% for minis. If you’re long, you pay ARR. If you’re short, you receive it.

In the following calculations, to keep things simple we’ll use an indicative ARR rate of 0% and use the pound sterling as our currency. In practice however, the costs may need to be converted to the Singapore dollar which comes with a charge.

Spread cost

£10 x 1 = £10

Overnight funding cost

2 x (£10 x 6000 x (2.5% + 0%) / 365)
= £8.21

Total cost = £18.21

Now compare the cost of using a futures contract, with a four-point spread, for the same trade. The overnight funding charges are built into the price, and there’s no 2.5% admin fee on this contract type – just ARR. In our example we’ve assumed a 0% ARR rate, which means you simply pay:

Spread cost = £10 x 4 = £40

So in this example your costs would more than double if you chose to trade the future CFD rather than the cash CFD.

Of course, in reality ARR would have a value – at the time of writing, for example, it’s 0.1%. However, since the same ARR rate always applies to both futures CFDs and cash CFDs, you can disregard it for the purposes of this cost comparison. You only need to consider the additional charge on cash contracts, which for indices is 2.5%. You won’t pay this when you trade a future – so after a certain number of days, that saving will outweigh the higher spread.

Question

Imagine you make the same cash CFD trade as in our example above, but instead you hold it for ten days. Assuming the closing price each evening remains constant at 6000, here’s how the charges would look: Spread cost £10 x 1 = £10 Overnight funding cost 10 x (£10 x 6000 x (2.5% + 0%) / 365) = £41.10, total cost = £51.10 But what if you used a futures CFD contract for this trade instead – how much do you think that would cost?
  • a More than the cash CFD
  • b Less than the cash CFD
  • c The same as the cash CFD

Correct

Incorrect

The cost of the future CFD would still be £40, since overnight funding is built into the price – and in this example is zero. That makes it a lot cheaper than the cash CFD in this scenario.
Reveal answer

Lesson summary

  • Choosing the right contract will minimise your costs from spread and overnight funding charges
  • Cash CFDs have lower spreads and higher overnight funding charges
  • Futures CFDs have higher spreads and lower overnight funding charges that are built into the price
  • Cash CFDs are generally better value for short-term trades
  • Futures are normally more cost-effective for longer-term trades
Lesson complete