CFD vs. Futures: What’s The Difference?

A CFD or contract for difference and a futures contract are two popular types of financial instruments for individuals looking to get exposure to stocks, commodities, and other assets traded in financial markets. While both enable individuals to carry out speculation regarding price movements without actually having ownership of the underlying asset, there are some key differences between CFDs and futures in terms of certain elements. These aspects include the mechanics, costs, and associated financial risks.

If you wish to understand the distinct characteristics and delve into other related information, this guide on CFD vs futures can be helpful. This is because the article covers leverage differences, regulation differences, expiration rules, besides other important aspects in detail. So, by the end, you will have a clear understanding of how CFD and futures trading basics differ.

It is important to keep in mind that a CFD is a synthetic financial instrument and does not come with an obligation to purchase or sell the underlying asset. One simply enters into a contract with a broker and makes gains from the price difference of the underlying asset. Hence, if you trade CFDs with Axi, there is no possibility of owning an asset or taking delivery by trading a contract for difference. 

On the other hand, in the case of a futures contract, individuals have the obligation to either sell or buy a specific quantity of the underlying asset on a predetermined date. If the buyer opts for physical delivery, then the possibility of ownership arises. That said, most traders choose to close their position prior to contract expiry, thus avoiding physical delivery of the underlying asset. 

When exploring CFDs vs futures, one can find that there is no question of contract length or expiration rules in the case of the former. Indeed, CFDs offer flexibility, allowing individuals to maintain their position as long as they can manage the costs. There is no need for an active approach. 

On the other hand, futures trading requires an active role as the contracts come with an expiry date. Also, futures are associated with rules that serve as guidelines concerning contract settlement, which can be of two types: physical delivery and cash settlement. Note that once a futures contract expires, one cannot trade it. Additionally, if futures traders do not wish to carry out a settlement, they can opt for a rollover to keep their position open. 

CFDs, as well as futures, involve the use of leverage to enter and keep a large position open. That said, when exploring CFD vs futures contracts in detail, one can figure out that leverage differs with regard to certain aspects, like structure, risk, and cost. In the case of futures, leverage is subject to regulations via margins, which the exchanges usually set. That said, CFDs generally are associated with a higher leverage, which the broker sets. Although the higher leverage increases the profit potential, it also results in an increase the risk exposure. 

Two key factors to consider when exploring CFDs vs futures are standardization and flexibility. Compared to futures, CFDs are more accessible and offer greater flexibility as they do not require a significant amount of capital and can be used to get exposure to a wide range of financial instruments. 

Futures are subject to standardization in terms of specific exchange frameworks as they are traded on exchanges. Indeed, futures come with a specific contract length, expiration date, size of contract, etc. Also, the capital requirement to start trading futures contracts is typically high. These aspects limit flexibility and accessibility. That said, the standardization concerning futures, on the other hand, ensures transparency and safeguards market participants. 

When discussing CFDs vs futures, diving into the differences in costs and fees associated with both is imperative. Note that their cost structures can vary. Typically, a certificate of deposit involves a spread, which is basically the difference between the purchase price and the selling price. CFDs may also attract overnight financing charges in case traders hold them for more than a day. 

Contrary to CFDs, futures are not associated with overnight funding charges and usually come with upfront costs, for example, exchange fees, margin requirements, and commissions.

The main difference between CFDs and futures with regard to regulations applicable across different markets worldwide is that futures are subject to rules and regulations related to exchanges, while CFDs are not. This is because futures are traded on exchanges like the NYSE, CMX, and more., while CFDs are traded over the counter. The rules and regulations are generally associated with reporting, margin requirements, etc. 

Since CFDs do not trade on exchanges, they are not standardized in comparison to futures and are not subject to strict regulatory oversight. While some countries strictly prohibit CFD trading, some regions allow it but lack rules and regulations to protect market participants.

The settlement process is one more key element to consider when discussing CFD vs futures. Contrary to futures, CFDs involve cash settlement. This means that in the case of the latter, there is no question of physical delivery. The trader simply earns the difference between the price level at the time of opening the position and the level at the time of closing the position. 

In the case of futures, there’s a possibility of physical delivery apart from cash settlement as well, depending upon the type of underlying asset. That said, traders can choose to close their position prior to expiration to avoid taking physical delivery. 

Once individuals have the differences concerning futures and CFD trading explained to them, they can decide which financial instrument is better suited to their risk appetite and goals. Note that it is crucial to weigh the pros and cons with regard to certain aspects discussed in this CFD vs futures guide, for example, flexibility, costs, etc., to make an informed decision.