CFDs and futures contracts are designed to speculate on the future price movements of an underlying asset by taking a leveraged position on those price changes.
What is a CFD?
A contract for difference is where two parties agree on a price of an asset today, which can be settled at some point in the future; this includes shares, indices, and currencies. If the difference between the agreed price and the market value when settlement is due is in the money, one party pays to another. If not, they receive a payment.
What are future contracts?
Meanwhile, a futures contract is a standardized agreement that binds two parties to take or make delivery of an asset or financial instrument at a predetermined point in time in the future and a predetermined price. The number of commodities with their futures contracts supporting them exceeds those available with CFDs – from coffee beans to cotton and rubber. Almost every agricultural product has its dedicated contract on some exchange somewhere globally.
Both CFDs and futures contracts can be used as instruments to hedge against adverse price movement; however, they differ in some key respects.
Futures fees tend to be lower than CFD fees because futures commissions are negotiated on a TDM (Transaction Dealer Market) basis, not on a per-trade basis like for CFDs and other over-the-counter products (e.g., forex). The typical transaction fee for a round-turn futures contract is around 10 – 15 bps*, whereas most retail brokers charge 50 – 75 bps* for CFDs.
Futures contracts generally require a higher initial outlay than CFDs in the form of margin; however, this enables traders to take much more prominent positions, thus maximizing their potential returns and losses and reducing the number of transactions required to make a meaningful profit or loss.
Leverage with futures is typically lower than when trading CFDs due to transaction fees and minimum investment requirements (which must be met before placing an order). Most brokers offer leverage of around 20:1 or less on futures, whereas many offer 100:1 or even up to 400:1 on CFDs, e.g., IG Index offers 200:1 on its popular FTSE100 and S& P 500 CFDs.
Minimum contract size
Typically futures contracts are much larger than CFDs, e.g., a typical E-miniS& P500 future is valued at around $50* per point, whereas the average FTSE 100 or Euro Stoxx 50 futures are between €25 – €50* per point (giving a multiplier of 5000 to 10,000).
Standardized lot sizes for many CFD instruments are typically 0.01, which would mean buying or selling one contract would require an investment of around £10,000 or €11,000, respectively. It can make it difficult for investors with smaller funds to trade these products of insufficient size to make meaningful gains.
Futures contracts are traded during the day (when the market is open) and during extended evening/overnight trading sessions (usually with reduced liquidity). It enables traders to place orders when it suits them best, instead of having to be glued to their screens all day.
CFDs are traded only during the day; however, most brokers now offer limited after-hours trading on specific instruments, e.g., IG Index offers EU Stoxx 50 CFDs until 2 am London time Monday – Friday.
When trading futures or CFDs, it is essential to understand the risks involved with these kinds of trades. For instance, while a small deposit can open a position with a CFD broker(check out Saxo for more info), this does not mean that you will only lose some of your money if you’re wrong – if you make a dire prediction on this trade, then you could lose everything except for the initial margin amount paid.
In comparison, because futures contracts don’t involve leverage, it means there is no additional risk involved other than the fluctuation of the market price and collateral required at opening plus commissions. It is why Norwegian traders interested in future trading often also decide to open an account with a broker that offers CFDs.