Traders do have a few different options available for trading. One of the most popular choices is CFDs (contracts for difference) and futures.
CFDs are contracts between two parties, where one party agrees to pay the other party the difference in price between an opening and closing position. On the other hand, futures are a type of contract where the buyer agrees to purchase an asset at a pre-determined price on a specific date in the future.
The key difference between CFDs and futures
What’s the difference between these two types of trading?
How they work
The first difference between futures and CFDs is how they work. The value of a future derives from an existing asset, which means this derivative has to be bought or sold in advance. In contrast, a CFD is based on market sentiment about the price movement of any underlying security, so no transaction has to take place until after the purchase or sale of contract terms have been made. With futures, transactions are settled daily, meaning payment successively through each day of the contract, but buyers can settle the contract on any day with CFDs.
Level of exposure
The second difference is the level of risk exposure. Futures are contracts between two parties where both have agreed to buy and sell an underlying asset at a specific price on a particular date in the future.
Because futures are based on an underlying asset, there is a limited downside as you will only lose what you invested should the market move against your position. On the other hand, CFDs are leveraged products, which means you can trade a larger position than your account balance. This makes CFDs riskier as losses will be amplified if the market moves against your position.
Benefits of futures
One of the main benefits of futures trading is that it offers traders protection against price movements in the underlying asset. For example, if you buy a gold future and the price of gold falls, your loss will be limited to the price you paid for the contract. CFDs do not offer this same level of protection.
Another benefit of futures is that they are often considered less risky than other types of trading, such as forex or stocks. Futures contracts are standardized, meaning that the contract size and the underlying asset price are always the same. This eliminates the risk of price movements between entering into a trade and when it expires.
Benefits of CFDs
The regulatory environment is very stable and well-defined, which gives traders confidence when making trades. A wide range of products is available like trading indices, stocks, commodities, and currencies. The spreads are typically very competitive, making it possible to earn healthy profits even when the markets are in flux.
CFDs allow traders who do not have large capital reserves to make significant trades without breaking the bank CFDs allow traders to buy and sell at today’s prices and only be required to pay the difference between the buy and sell price. Traders can thus capture gains almost as soon as they make them and manage risk more effectively.
CFDs use significantly less capital than traditional trading, allowing entry into a trade that may otherwise be too costly to pursue. Traders only need to put down 10% of their trade’s value to start using leverage.
In Conclusion
Since futures are settled daily, this product is better for traders who trade smaller positions and avoid overnight risk. On the other hand, CFDs are better for traders who wish to trade a more prominent position size and are willing to take on more risk. It is essential to consider your investment goals and risk appetite before deciding which product is right for you. When buying shares, novice traders are recommended to use a reputable online broker from Saxo Bank. For more information on their products and services, go to their official site here.
