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CFD or Futures — what to choose for trading?

Investing in financial markets can be very profitable. This is the reason why many people are active in these markets. Investment conditions vary widely from one market to another. For this, it is essential to choose the financial market and the instruments that match your profile. Making a good choice affect your success in the financial markets.

One of the biggest dilemmas of new traders is the choice between Futures, Forex, and Equity markets. Let us look at this subject thoroughly. This article will focus on futures and forex markets especially CFDs. The answers to the following questions will be detailed in a practical way:

Futures and CFDs, derivatives on financial markets

In financial markets, there are the assets (instruments) on which we speculate, and there are derivatives of these assets. CFDs and Futures are among the most preferred derivatives financial products by traders. Among the assets on which it is possible to speculate with CFDs and Futures, there are:

  • Bonds and treasuries (Bunds for Germany, T-Bonds for the USA, Gilts for the United Kingdom and OAT for France)
  • Shares (Google, Apple, Facebook, Macy's, Amazon ...)
  • Indexes (Dax 30, Cac 40, Hang Seng or Hong Kong 50, S&P 500, Dow Jones 30, Nasdaq 100, etc.)
  • Commodities (Corn, Wheat, Soybeans, Sugar, Oil…)
  • Metals (Gold, Silver, Platinum, Palladium...)

Note: As in the forex market, with futures it is possible to speculate on the rise or fall of currencies. You can trade futures contracts on instruments like EUR / USD and GBP / USD.

We have just seen the assets from which CFDs and Futures are derived. But what are CFDs and Futures?

What is CFD?

CFDs or contracts for difference were invented by cunning English brokers in order to offer English customers to trade stocks on the LSE without paying a special tax duty. Formally, the CFD deal is not a deal with the stock, which means it does not fall under the tax.

CFDs are over-the-counter contracts, between a buyer and a seller (on the stock exchange the contract is made between a broker and his client). With a CFD there are 2 main steps:

  • The trader bets on the rise or fall of an asset;
  • At the close of the bet, the difference between the closing price and the opening price of the bet is calculated to know the loss or gain of the trader.

An example to illustrate:

A trader buys Dax 30 CFD at 12690 and close his trade at 12720. No matter the size of his contract (the number of units he purchased), at the close of the position he gained 300 ticks (ie 12720 - 12690).

If on the contrary, he had sold Dax 30 CFD at 12690 and closed his position at 12720, he lost 300 ticks.

Note: CFDs are not available in all countries (e.g. the United States of America)!

Below are some CFDs you can trade while using PTMC with your preferred broker.

What is a Future?

Futures even if they are derivatives of the same financial assets as the CFDs are different because of the characteristics of their contracts. Indeed, a futures contract is a forward contract between a potential buyer and a potential seller. So there is a new variable that futures contracts introduced in the financial market - the expiration date. Indeed, both sides of a futures contract commit to buy or sell a financial asset at a predetermined price on a specified date in the future. On the stock exchange, profit (or loss) is calculated in this case by making the difference between the price fixed by the Future contract and the price of the asset at the expiry date of the contract. In financial markets, futures represent at least 40% of trading volume.

It should not be believed that the buyer and the seller involved in a Future contract are required to keep their commitments to the expiry date of the contract. Indeed, before the expiry date, a trader can close a future contract in any time.

Let's go a little deeper into the subject to detect differences between Futures and CFDs.

5 Significant differences between CFDs and Futures

To compare CFDs and Futures, there are numerous important parameters to consider, including liquidity, transaction costs, contracts’ management, financial regulation (jurisdiction) and account management policy.

But even before talking about these different parameters, it is crucial to understand that the futures market is a standardized market whereas, for CFDs, each broker creates its own market. In fact, futures traders are in a global market, while traders on CFDs are in a localized market with their respective brokers.

On the futures market, the rules and prices of financial assets are therefore unanimous and fully transparent. On the other hand, for CFDs, each broker carries out the quotation. Fraudulent manipulations are therefore more numerous and more frequent by dishonest brokers. Moreover, logically, CFDs prices vary depending on your broker from a few ticks to several pips.

1. CFDs vs Futures: Liquidity

Since each broker is the creator of liquidity for the CFDs he proposes, CFDs market offers very good liquidity. Moreover, it is easy for traders to open trades with small contracts according to the rules of the broker.

On Futures markets, the liquidity is also high, even though it doesn’t equal CFDs liquidity that in reality is unlimited. Compared to the Forex market which has more than 5 trillion USD transactions each day, Futures market transactions value is 30 billion per day. This can make someone think that Futures market is not liquid. But remember that Futures represent 40% of financial transactions in stocks exchange. Then, Futures traders always have counter-parties on the market. Among the most liquid Futures, there are S&P 500, Bund and Eurostoxx 50. The next table can help you choose which Futures you can trade among the most liquid asset of the market.

Futures Average Daily Volume (contracts)
S&P500 E-mini (Globex) over 1.6 million
10 Year T-Notes (CBOT) over 1.4 million
Nikkei 225 Mini (JPX) almost 1 million
Euro-Bund (EUREX) over 800 000
5-Year T-notes (CBOT) over 700 000
Euro-Bob (EUREX) over 700 000
Brent Crude Oil (ICE) over 400 000
Gold (CMX) over 300 000
Euro-Schatz (EUREX) over 300 000

2. CFDs vs Futures : Transaction costs

Exchange spreads on the Futures market are very tight, since brokers are remunerated with commissions on traders’ contracts. For example, with AMP Futures (Futures assets broker available on PTMC), fees vary according to numerous parameters (exchange, data feed, and trading platforms) ranging from 0.10 USD to 2 USD per side.

However, with CFDs, commissions (fees) do not exist with most brokers. Brokers offering CFDs usually use quotes with which spreads are higher than on Futures assets. In addition, CFD brokers charge overnight commissions per day, which is not the case on the Futures market. The next screenshot show spreads on indexes CFDs offered by OANDA.

3. CFDs vs Futures: Contracts clearing

Financial transactions are managed in different ways on CFDs and Futures markets. It can be said that you have more guarantees that your trades will be well executed on Futures markets because of Clearing Houses.

Remember, CFDs quotations are located to your broker, then you have only a deal with your broker when you trade CFDs. This means that almost all CFDs contracts are only managed by your broker. Can your broker be trusted when managing your CFDs contracts? Maybe, or not.

On the other hand, when you’re trading Futures, you’re in a global market. On this market, financial transactions are managed by some institutions which are Clearing Houses. These financial institutions are intermediaries between buyers and sellers and ensure that their legal obligations are really fulfilled. When a clearing house is involved in the management of financial transactions, this risk to deal with dishonest brokers is really reduced. You can see in the next picture how a clearing house act on Futures market regardless the broker to ensure transparency for buyers and sellers trades.

4. CFDs vs Futures : Financial regulations

To ensure safety in financial markets, many associations control brokers' activities. Among them, the best known are:

  • the U.S. Commodity Futures Trading Commission (CFTC),
  • the U.S. National Futures Association (NFA),
  • the Investment Industry Regulatory Organization of Canada (IIROC),
  • the UK Financial Services Authority (FSA),
  • and the Japanese Financial Services Agency (FSA).

On the market, you can find both CFDs and Futures brokers regulated. But keep in mind that CFDs market is not fully regulated as Futures markets where transparency is a must and market rules more trustful. While choosing a CFDs broker, make sure he is fully regulated by at least one or more of above financial authorities.

5. CFDs vs Futures : Management of customers’ accounts

US Futures and Options legislation requires that client’s funds and positions are kept separate from the funds and positions of the clearing brokerage firm. This protects the client from insolvency or financial instability of the broker. Many trustful financial authorities recommend to traders only brokers that have segregated account for their customers. For Future's brokers, it is a must. Though CFDs brokers have also segregated accounts, but it’s not always the case. Then you have to be cautious when choosing your CFDs broker.

What about CFDs and Futures with PTMC?

PTMC offers to traders numerous opportunities for trading Futures or CFDs according to their needs. To trade CFDs with PTMC, you can choose brokers: FXCM, OANDA, Interactive Brokers or LMAX. Among brokers that offer Futures assets, there are Cannon Trading, Dorman Trading, Interactive Brokers, Wedbush and AMP Futures. Make your choice and enjoy having profit on the market.

What can we say to summarize?

CFDs and Futures allow you to speculate on the financial markets on nearly the same assets (currencies, commodities, stocks, indices, bonds ...). But these markets are for various public and your economic profile will largely determine your preference. Most professional traders with large capital avoid CFDs. Individual traders who have low capital move much more towards CFDs.

The following table summarizes pros and cons of Futures and CFDs to consider while choosing the market that suits your investment profile.

Markets Pros Cons
Futures Protection against bankruptcy of the broker
Transparency of the market, price, and rules
Equality between traders
Significant starting capital
Contract limited by expiry date
CFDs Low starting capital
No expiration date
Simplicity and flexibility
High leverage
Many assets are available
Lack of transparency
High leverage (trap when money management rules are not respected)
Not available for US residents

Have not tried PTMC yet? There is no better way to boost knowledge than to use it! Start trading with PTMC now!

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