CFD Trading vs. Futures Trading: 5 Basic Differences
Updated November 13, 2023.
In the last few years, CFDs and futures have become popular ways of trading a variety of markets and different instrument classes, like shares and forex pairs. Namely, these are derivative products that have their price linked to a real financial instrument. Since they are derivatives, they are relatively easy to trade and can be traded with leverage, making them attractive to traders.
Still, many use CFDs and futures interchangeably, not recognizing that there's an innate difference between them. So, what are the differences between CFDs and futures? Keep reading to find out.
CFD Trading Defined
CFD is an abbreviation for contract for difference, a type of derivative trading that enables traders to speculate on the price movement of underlying instruments without actually owning them. CFDs are traded on margin, which means that traders can leverage their positions to enter larger trades than they would otherwise be able to afford. Although CFDs are beginner friendly, one of their biggest downsides is overnight fees (also known as swap fees), which are charged for every night the position remains open. Although these fees are small (usually less than 0.5%), the amount can quickly add up.
Example of CFD Trading
With a CFD position, a trader can trade the price of 100 shares of Microsoft (MSFT) while having capital in the account to trade for just 1 share price. Then, if Microsoft's stock price goes up by $1, the account balance for that trade will increase by $100. If it drops by $1, the account balance will decrease by $100.
Since CFDs have no expiration date, the trader can close the position whenever they see fit but will have to pay an overnight fee for each day the position remains open.
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Futures Trading Defined
Futures are a type of contract that obliges the holder to buy or sell an instrument at a predetermined price at a specified date in the future. As a derivative product, futures are slightly more complex than CFDs, as they require knowing more details about the instrument to fill an order.
Example of Futures Trading
Say, for example, the price of Microsoft stock is trading at $250 per share, and a trader makes a futures contract with an expiration date in December with 1:50 leverage. If the Microsoft stock trades at $255 per share in December, the trader will end up with a 50 X $5 = $250 profit (50 due to the leverage and $5 in the price change).
On the other hand, if the price of the stock goes down to $245 when it expires, the trader will incur a $250 loss.
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