The Difference between CFDs and Futures
2023-08-03
Summary:
The main difference between CFDs and futures lies in the trading and delivery methods. CFD trading is completed over-the-counter with traders or brokers, while futures trading is conducted on exchanges.
A contract for difference (CFD) is a financial derivative instrument whose value depends on the rise or fall of the underlying asset price. Futures contracts are standardized contracts that stipulate the purchase or sale of underlying assets at a specific price on a specific future date.
There are some important differences between CFDs and futures in terms of trading methods, delivery methods, and exchange requirements. Here is a detailed comparison of them:
1 Trading Method
CFD trading is completed over-the-counter with dealers or brokers, where both buyers and sellers directly engage in trading on the trading platform. Futures trading is conducted on the exchange, where buyers and sellers match and trade through the exchange.
2. Contract Type
A CFD is a type of contract for price difference whose value is related to the price difference of the underlying asset. When investors buy CFDs, they will earn the difference between the rising value of the underlying asset and the buying price difference. On the contrary, when investors sell CFDs, they will earn the difference between the falling value of the underlying asset and the selling price difference. Futures, on the other hand, are standardized contracts whose value is consistent with the actual price of the underlying asset.
3. Leverage Effect
CFD trading provides leverage, allowing investors to control larger trading positions with smaller capital investments, thereby amplifying profits or losses. Futures trading also provides leverage, but the leverage ratio is usually lower compared to CFDs.
4. Delivery Method
CFDs do not involve actual delivery, and investors earn profits or losses by settling the price difference during the liquidation. Futures trading, on the other hand, is carried out through physical delivery or cash delivery, depending on the contractual provisions.
5. Trading Time and liquidity
CFD trading is usually conducted on the platform of traders, and its trading time can be extended to 24 hours with high liquidity. Futures trading can only be conducted on designated exchanges with specific trading time periods.
6. Regulation and Transparency
The regulation of the CFD market is relatively loose, so investors need to choose reliable traders on their own. And futures trading is strictly regulated, with strict regulations and supervision from regulatory agencies, making the trading process more transparent.
Price difference contracts are purely generated for trading to earn price differences and cannot truly hold physical assets. The advantage of price difference contracts is that they provide investors with a way to conduct low-cost trade using one account. All index, industry index, bond, and commodity futures CFD trade are commission-free.
It can be seen that price-difference contracts are more suitable for pure trading. However, compared to stock index futures, price difference contracts can truly be considered only numerical changes, which can also provide opportunities for many illegal platforms. Traders should choose suitable trading tools based on their own needs and risk tolerance.
Disclaimer: Investment involves risk. The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.
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