The main differences between CFD contracts and futures
We continue our series of articles on Contracts for Difference, or CFDs. And today we will talk about the differences of this financial instrument from futures.
Common characteristics of a futures and a CFD contract
Futures contracts and CFDs do have quite a few common characteristics. The main ones are:
- Availability of the underlying asset;
- Margin Accumulation;
- Loss of interest rate on investments.
For CFDs no interest is charged for the reason that the dealer accepts the client's account as a deposit. It follows that the purchase of an asset is made on credit, even if the deposit amount is greater than the cost of the purchase itself.
As for futures, the logic is even simpler. The starting price of the futures is greater than the value of the asset, and naturally, when the time of expiration is reached, the futures price coincides completely with the spot price, which leads the speculator to lose a certain amount of money, in the amount of the interest rate.
Another common feature is Investor attitudes towards these financial instruments. Both futures contracts and CFDs are of equal interest to investors as potentially high returns on invested capital.
The difference between futures and CFDs
However, this is where the general characteristics of futures and CFDs end, and a number of differences begin. Such as:
- The broker guarantees the quality of orders execution in CFD, while in the case of futures, all guarantees lie with the Exchange Center, where trading takes place.
- The CFD price is determined by the broker, while the futures price is determined by the trading on the exchange.
- When working with CFD-contracts broker does not charge commission: trade is carried out only on spread. In futures, there is both a spread and a brokerage commission. And it would be logical to assume that CFD trading is then cheaper. However, such a move is offset by the fact that spreads on CFDs are usually much higher than on exchange-traded futures.
- With CFDs, the swap is charged daily, while futures involve a daily rollover over the life of one contract.
- When working with CFD-contracts, there is a possibility of a conflict of interest between the broker and the client. For example, if the broker does not put the trades on the interbank market, the client's losses can increase the broker's profits. With futures it is different: these contracts are by default placed on the exchange market.
- If any disputes arise between participants of futures trading, the world-famous regulators such as the CFTC, FSA and NFA will be the judges. When dealing with CFD, the regulator will be the broker himself: it is his right to cancel the problematic transaction completely and not to pay out money.
- When working with futures brokers, the client's funds are in the bank account, while when trading CFDs, the client's funds are credited to the broker's account. Thus, if the broker goes bankrupt, the client can lose all his money, unlike a similar force majeure for futures brokers.
In practice, the most important difference is that, working with futures or stocks, the trader becomes the owner of the assetThe trader earns only on price changes of this asset, without owning the asset itself.
How are these differences important? Having all these differences between futures contracts and CFDs helps traders to choose the financial instrument that suits them best.