CFDs vs futures: what are the differences?
CFDs and futures are both popular derivative products that you can use to speculate on financial markets. Discover the differences between CFDs and futures and which is best for your trading strategy.
|Is there an expiry date?||Yes||No|
|What asset classes can I trade?||Commodities, indices, currencies and bonds||Commodities, shares, ETFs, indices, currencies, cryptocurrencies, options, futures, bonds and more|
|Will I take ownership of the asset?||Yes, in the case of physical settlement but not if you decide to settle in cash||No, you’d never take ownership of the asset|
|What is the medium of exchange?||Futures trade on exchanges||Over-the-counter transactions between you and your broker|
|Are the trade sizes flexible?||No, all futures contracts are standardised into lots||Yes, although CFDs mimic the lots of the underlying, you can trade in smaller increments|
Futures contracts have set expiry dates on which the asset in question will be exchanged. Futures are divided into several expiration dates through the year, each of which is only active for a certain amount of time. For example, index futures usually have expires for the third Friday of every month. Once the contract expires, it cannot be traded anymore and would be settled.
In contrast, CFDs have no fixed expiry date. You’d be entering into an agreement to exchange the difference in price between the point you entered the contract and when you close it.
When you trade futures with us, you’ll actually be opening a CFD position on the underlying market, which would only be available until the expiry date – at which point, we’d roll over your futures contract into the next month, unless you manually close your position.
Futures contracts can cover a range of assets. The most well-known futures market is commodities, but if you’re looking for volume and liquidity, you might want to consider stock indices and currencies – as these are the most highly traded futures markets.
Ownership of assets
When you enter a futures contract, you’d have two options at the date of expiry:
- Physical settlement – taking delivery of a commodity or ownership of underlying shares, currencies and bonds
- Cash settlement – instead of taking delivery or ownership of the asset, you’d only transfer the amount in cash
When you trade CFDs, you would always settle a position in cash. You wouldn’t ever take ownership of the underlying asset – which can have significant tax benefits, such as no stamp duty to pay.1
Medium of exchange
Futures are traded on exchanges – a marketplaces where parties come together to buy and sell specific quantities of an asset. These exchanges are highly regulated to ensure quality of products and the smooth transition of assets between parties.
The Chicago Mercantile Exchange (CME) is probably the most famous futures exchange. It specialises in agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and even weather futures.
CFDs are traded over-the-counter (OTC) directly between you and your broker or trading provider. OTC trades tend to be more flexible when compared to their exchange-based counterparts, which are more regulated. This means that you can create agreements that are specific to you and your trading strategy.
As futures are traded on large exchanges, the contracts are standardised in both quality and quantity. The trade sizes for futures are often large as they’re designed for institutions.
CFDs are also traded in standardised lots in order to mimic the underlying asset. However, you can trade contracts in increments.
For example, a typical gold futures contract is the equivalent to 100 ounces, or approximately $192,800 at the time of writing. While gold CFDs are also the equivalent to 100 ounces per contract, you could trade a minimum of 0.03% of a contract, or an approximate exposure of $57.84.
Similarities between CFDs and futures
It’s also worth noting that futures and CFDs do have a lot of similarities. They’re both:
- Derivative products – which take their value from an underlying market. This means you can trade the underlying market without taking ownership of the asset in question
- Speculative – so you can go both long and short on the underlying market price, trading on markets that are rising and falling in value
- Leveraged – meaning you can get full market exposure for just a fraction of the total cost. Both profit and loss are calculated off the full value of the trade, not the initial deposit – magnifying your potential gains and risk
CFD trading basics
When you buy or sell CFDs, you enter into a contract to exchange the difference in an asset’s price from when the position is opened to when it’s closed. You’d go long if you think an asset will rise in value, and short if you think it will fall.
To calculate your profit or loss , you’d simply multiply the difference between your opening and closing prices by your deal size and the value of each contract.
For example, you bought 10 FTSE 100 CFDs when the buy price was 6000. As each contract is equal to £10 per point of movement, when the market moves upward by one point you’d make £100 and when it falls by one point you’d lose £100.
If the market had risen by 25 points when you decided to close your trade, you’d have a total profit of £2500 ([25 x 10] x 10). However, if it had fallen by 30 points instead, when you close your trade you’d have lost £3000 ([30 x 10] x 10).
Futures trading basics
A futures contract is an agreement to buy or sell an asset at specific price, on a specific date in the future – regardless of what the market value is at the time of expiry.
As futures can be settled in cash, they can be used to profit from price fluctuations. If you think the market’s value will decline, you’d buy a contract with a lower price at expiry than the current market value. And if you think the market will increase, you’d buy a futures contract with a higher price at expiry than the current market value.
For example, you want to buy US crude – currently trading at $54. To hedge against the price rising, you opt to buy a July WTI futures at $50. If at the time of expiry, the price had risen, you could buy 1000 barrels of oil at the agreed price, regardless of the market price at that time.
CFD futures explained
You can trade futures via CFDs in the same way as any other market. You wouldn’t be entering into a futures contract, but rather speculating on the underlying price of a futures contract.
For example, if you thought the price of US crude futures will rise, you could open a long CFD position with an expiry date for the end of the month. If the price of crude oil futures had risen at the expiry, you’d make a profit. However, if the price of oil declined instead, you’d have made a loss.
Pros and cons of CFD trading
Pros of CFD trading
There are a range of benefits to CFD trading. For example, you can:
- Access 17,000+ markets – including shares, indices, commodities and currency pairs
- Make your capital go further with leverage
- Go short without the intricacies of traditional short selling
- Deal directly into the order books of stock exchanges with direct market access
- Trade with no stamp duty1
- Deduct your losses from profits for tax purposes1 – making CFDs useful for hedging
Cons of CFD trading
CFDs are complex instruments and before you trade, it’s important to be aware that:
- Leverage can magnify losses, creating the need for a risk management strategy
- A level of expertise is required – trading in a demo account can help to develop your skills
- Any positions left open overnight are subject to funding fees
- CFDs are liable to capital gains tax (CGT)1
Pros and cons of futures trading
Pros of futures trading
There are a range of benefits in futures trading. For example, you can:
- Hedge against existing investment positions to protect yourself from adverse market movements
- Trade over the longer-term with all costs included upfront, so you’ll never pay more for overnight funding
- Leverage your capital to open a position for just a small initial deposit
Cons of futures trading
Before you trade futures, there are a few drawbacks to be aware of, such as:
- Futures are suitable for more experienced traders as they require high levels of knowledge to understand the mechanics
- Futures prices are tied to their expiry dates, meaning that once the contract has expired, the market ceases to exist – which makes it difficult to perform analysis over longer time frames. Our proprietary spot markets have no fixed expiries, so you can see a full history of price data
- Taxation for futures varies depending on your geographical location and whether you take ownership of the underlying at the date of expiry – usually CGT and stamp duty would apply if you took delivery of the asset1
- Leveraged trading can amplify losses as well as profits – making it important to have a risk management strategy in place
CFDs vs futures summed up
- CFDs and futures are both popular derivative products
- Futures have set expiry dates, while CFDs have no fixed expiry dates
- You can trade commodity, stock index, currency and bond futures, or CFDs on the price of stocks, indices, commodities, currencies, options, bonds and futures
- When trading futures, you can settle with the physical delivery of the asset or in cash. CFDs are only cash-settled, so you won’t ever take ownership of the underlying assets
- Futures are traded on exchange, CFDs are traded over-the-counter (OTC)
- Futures are traded in standardised lots, CFDs mimic the underlying asset’s lots but can be traded in increments
- Both CFDs and futures are derivative products, are used for speculation and are leveraged products
- CFDs and futures can be used to trade rising and falling market prices
- There are a range of benefits to CFD trading, such as the range of markets to trade, leverage, short selling, and tax-deductible losses1
- There are risks of CFD trading to be aware of, such as magnified risk, complexity, overnight fees and CGT tax1
- There are a range of benefits to futures trading, such as their use in hedging, long-term cost efficiency and leverage
- There are risks of futures trading too, such as the lack of long-term data, tax upon physical settlement1 and the possibility of magnified losses when you trade with leverage
1Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
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