Futures trading and CFDs trading on the surface appear to be similar in several ways and many novice traders might consider them to be precisely the same, however, this is not the case. Novices tend to initially believe both futures and CFDs are the same because both operate in the futures markets. Both support long term trading as opposed to short term trades such as the trades’ day traders and intraday traders indulge in. Another similarity of futures trading and CFDs trading is that the underlying assets for both are assets of currencies trading; commodities trading; indices and stock trading.
CFDs trading and futures trading are both derivative forms of trading. However, despite the similarities mentioned above, the two are very different from each other. CFDs trading and futures trading have a basic difference at their foundation. Futures’ trading is carried out in centralized open markets where all trades, rates and quotes are transparent to all market participants. The Futures’ market is an electronic market and all trades are executed almost immediately. In addition, both professional and private investors are able to see the same information and the same related market data. The underlying instruments which investors can trade in the Futures’ markets are more than in the CFDs market so investors have a wider choice of instruments they can hedge.
CFDs’ trading on the other hand is conducted through a broker who acts as the counterparty to the trade, whereas in Futures’ trading the broker is simply the intermediary. In CFD’s trading, the broker is the effective counterparty to the transaction. While the broker wouldn’t be initiating or creating the contract for difference, they will be quoting the prices for both the parties in the trade, for the buyer as well as the seller. This could be a big disadvantage for the CFD trader, as the broker who is the intermediary between the buyer and seller has the opportunity to manipulate the prices on both sides for their own benefit a buyer wouldn’t be able to sell the CFD in the open market and a seller wouldn’t be able to buy from the open market or directly from the counterparty.
CFDs’ trading also involves much larger spreads than the spreads quoted in futures’ trading. However, on the other side of the coin the fees and commissions in CFDs’ trading are much cheaper than the fees and commissions in Futures’ trading. Both CFDs’ and Futures’ are traded using a margin account, however, the Futures’ margin accounts will require more capital investment as the Futures’ trades are much larger than CFDs’ trades.