1.Expiry dates
Futures contracts have set expiry dates on which the asset in question will be exchanged. Futures are divided into several expiration dates through the year, each of which is only active for a certain amount of time. For example, index futures usually have expires for the third Friday of every month. Once the contract expires, it cannot be traded anymore and would be settled.
In contrast, CFDs have no fixed expiry date. You’d be entering into an agreement to exchange the difference in price between the point you entered the contract and when you close it.
When you trade futures with us, you’ll actually be opening a CFD position on the underlying market, which would only be available until the expiry date – at which point, we’d roll over your futures contract into the next month, unless you manually close your position.
2.Asset classes
Futures contracts can cover a range of assets. The most well-known futures market is commodities, but if you’re looking for volume and liquidity, you might want to consider stock indices and currencies – as these are the most highly traded futures markets.
With CFDs, you could trade an even wider variety of markets, including futures, stocks, indices, commodities, currencies, cryptocurrencies, options and bonds.
3.Ownership of assets
When you enter a futures contract, you’d have two options at the date of expiry:
- Physical settlement – taking delivery of a commodity or ownership of underlying shares, currencies and bonds
- Cash settlement – instead of taking delivery or ownership of the asset, you’d only transfer the amount in cash
When you trade CFDs, you would always settle a position in cash. You wouldn’t ever take ownership of the underlying asset – which can have significant tax benefits, such as no stamp duty to pay.1
4.Medium of exchange
Futures are traded on exchanges – a marketplaces where parties come together to buy and sell specific quantities of an asset. These exchanges are highly regulated to ensure quality of products and the smooth transition of assets between parties.
The Chicago Mercantile Exchange (CME) is probably the most famous futures exchange. It specialises in agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and even weather futures.
CFDs are traded over-the-counter (OTC) directly between you and your broker or trading provider. OTC trades tend to be more flexible when compared to their exchange-based counterparts, which are more regulated. This means that you can create agreements that are specific to you and your trading strategy.
5.Trade sizes
As futures are traded on large exchanges, the contracts are standardised in both quality and quantity. The trade sizes for futures are often large as they’re designed for institutions.
CFDs are also traded in standardised lots in order to mimic the underlying asset. However, you can trade contracts in increments.
For example, a typical gold futures contract is the equivalent to 100 ounces, or approximately $192,800 at the time of writing. While gold CFDs are also the equivalent to 100 ounces per contract, you could trade a minimum of 0.03% of a contract, or an approximate exposure of $57.84.
Similarities between CFDs and futures
It’s also worth noting that futures and CFDs do have a lot of similarities. They’re both:
- Derivative products – which take their value from an underlying market. This means you can trade the underlying market without taking ownership of the asset in question
- Speculative – so you can go both long and short on the underlying market price, trading on markets that are rising and falling in value
- Leveraged – meaning you can get full market exposure for just a fraction of the total cost. Both profit and loss are calculated off the full value of the trade, not the initial deposit – magnifying your potential gains and risk
CFD trading basics
When you buy or sell CFDs, you enter into a contract to exchange the difference in an asset’s price from when the position is opened to when it’s closed. You’d go long if you think an asset will rise in value, and short if you think it will fall.
To calculate your profit or loss , you’d simply multiply the difference between your opening and closing prices by your deal size and the value of each contract.
For example, you bought 10 FTSE 100 CFDs when the buy price was 6000. As each contract is equal to £10 per point of movement, when the market moves upward by one point you’d make £100 and when it falls by one point you’d lose £100.
If the market had risen by 25 points when you decided to close your trade, you’d have a total profit of £2500 ([25 x 10] x 10). However, if it had fallen by 30 points instead, when you close your trade you’d have lost £3000 ([30 x 10] x 10).