Trading with CFDs and futures are two of the most frequently used ways to take up positions across a range of financial markets, including shares, forex, commodities and bonds.
While both types of trading allow individuals to capitalise on price movements without any need to purchase the tangible underlying asset, the financial derivative works very differently.
Understanding the difference between CFDs vs futures and choosing the right one for your trading style means considering costs, contract expiry, flexibility, access, margin, and execution.
CFD vs Futures: What Is the Main Difference?
Widely considered the more flexible of the two, CFDs are contracts traded over the counter via a broker. They are used to capitalise on price movements without owning the underlying asset.
Positions can be open for as short or long as desired, and leverage is a common feature of CFD trading, allowing traders to access larger positions with small deposits.
Traders can choose to take a long position where the asset is rising in price or a short position where its price is falling.
The flexible nature of CFD trading means that traders can adjust position sizes gradually and work alongside the latest market news and developments to capitalise on short-term market movements without any need to take on major contracts.
Futures trading is conducted on exchanges using contracts with an agreement between two investors to buy or sell an asset at a set price on a fixed date in the future. They typically have a higher barrier to entry and lower leverage in comparison to CFDs.
The seller of the futures contract will never transfer the underlying asset to the buyer; instead, funds are paid or owed in line with the changing market price of the futures contract.
This price may be higher or lower than the current market price of the underlying asset and reflects how investors expect prices to develop in the future. Futures are a more fixed and rigid style of trading with a clear structure and expiry date.
CFD Trading vs Futures: Cost and Margin Differences
CFDs and futures vary significantly when it comes to cost structures. CFDs incur spread costs (the difference between the buy and sell price) and overnight financing for any position held longer than a trading day.
When trading futures as CFDs, overnight funding costs may also apply. Exchange fees are typically wrapped up within the spread cost, where the broker’s spread can be wider than the underlying market price itself.
Exchange-traded futures typically incur clearer, more structured and higher upfront costs, including commissions (per trade) and exchange fees.
Futures usually have a higher margin requirement than CFDs, although this tends to be standardised, and the cost of the position from start to finish is often cheaper with futures, despite the higher upfront payout.
Spreads are typically tighter with futures than with CFDs. However, futures contracts do not usually require overnight costs, as these are wrapped up in the contract price.
Any costs involved will always depend on how long positions are held for. Regarding CFDs, overnight financing costs can add up quickly, making long-term positions pricey and potentially less attractive. This ties directly into another costing factor – the style of trading.
While CFD day traders and those with other short-term strategic approaches may not have overnight charges to contend with, they will likely feel the impact of spreads and commissions more than longer-term traders, as the cost of spreads can add up quickly.
The tighter spreads associated with futures trading make them more cost-efficient from this perspective.
Another crucial aspect of costs associated with futures vs. CFD trading is the type of instrument chosen. CFD spreads and other costs can vary significantly between brokers and markets, but futures costs are far more standardised due to their exchange based system.
This is because elements such as commissions, tick sizes, and margin requirements are largely consistent across brokers because they’re based on the same underlying exchange contract.
Futures vs CFD Trading: Flexibility, Expiry and Access
Trading with both CFDs and future contracts provides exposure to major markets such as indices, commodities, forex and bonds. The way that traders can access these markets and the flexibility of each trading type is very different.
Futures contracts are a structured, standardised trading instrument popular with institutional traders. They come with specific prices, contract sizes, margin requirements and expiry dates that cannot be changed.
Via exchange-traded contracts, traders can access a wide variety of instruments such as equity index futures and currency futures, with the specific conditions of every contract defined by the exchange itself.
In contrast, CFDs are over-the-counter products where pricing is derived from the underlying market but ultimately set by the broker, which can introduce variation in spreads, fees, and execution conditions.
CFDs are frequently offered alongside smaller trade sizes and fractional positions, making them far more accessible for retail traders at all levels. Many trades can also be held indefinitely, provided the trader can continue to cover the costs and margin requirements involved.
When it comes to CFDs vs. futures, CFDs offer a far more transparent process. These can be traded through a single broker account that offers access to a wide range of instruments and asset classes, as well as a range of position sizes.
Futures trade with the specific exchange-listed contract itself, tied to the underlying market of the asset they have chosen.
CFD and Futures Risks Traders Should Know
Both contracts for differences and futures come with a number of risks. Leverage is commonly used with these trades and can support traders in accessing larger positions with minimal upfront capital.
However, leverage can magnify potential profits as well as potential losses and increase the risk of margin calls, where positions are forcibly closed if there is insufficient margin left in the account.
The use of leverage with both futures and CFDs also increases the possibility of losses exceeding expectations, when even a small market movement may mean that additional funds are required to keep positions open or losses even exceed the original amount deposited.
Overnight charges for CFDs are another key risk. These costs can add up quickly if positions are held for more than a day and quickly eat into losses. Some trading strategies might incorporate only short- and medium-term trades in order to minimise these costs.
The expiry risk for futures has a number of facets. Should traders not close their positions before the deadline, they may go into forced liquidation, but if they choose to roll their positions over into a new contract, this can incur high costs and transaction fees.
There is often increased volatility in anticipation of the expiry date and this can lead to unexpected, unpredictable price movements. In some cases, traders also may be required by law to physically deliver the asset should they fail to close their position in time.
Volatility is another characteristic risk of trading with both CFDs and futures. High market volatility can leave traders contending with wider spreads, changing liquidity and increased margin requirements sometimes at very short notice. This can significantly impact position sizing and may even trigger margin calls if account equity falls below required thresholds.
Strict risk management tools and protocols, such as stop-losses, can help to alleviate such risks. Traders should also adopt good trading practices by closely monitoring the markets, staying informed about market-moving news such as earnings releases and adjusting risk management strategies in line with current conditions.
For futures traders, good trading discipline will include taking the time to learn contract specifications, expiry calendars, and broker execution policies to stay ahead of risk and effectively manage rollovers to avoid unintended exposure.
CFD vs Futures FAQs for Traders
What Are the Key Benefits of CFD Trading vs Futures?
CFDs are a highly accessible and flexible form of trading. They offer access to a wide range of asset classes and global markets from a single trading account for easy entry and diversification. They typically have lower initial capital requirements and good flexibility in comparison to futures, with no expiry dates and scalable options on all trades.
Futures Vs. CFDs: Which Is the Better Option for Professional Traders?
The structured and standardised nature of futures means they are often more suited to professional and institutional traders who appreciate the transparent pricing, deep liquidity, and contractual environment. They are also a useful hedging tool and can play an integral part in algorithmic trading strategies.
Which Is Better for Beginner Traders - CFDs or Futures?
CFDs are often considered more accessible for beginners because they usually require lower initial capital and offer flexible position sizing, whereas futures can involve larger contract sizes and more complex trading structures.
Do CFDs and Futures Both Use Leverage?
Yes, both CFDs and futures are leveraged products, meaning traders can gain larger market exposure with a smaller deposit. However, leverage can also magnify losses, which means even fractional market movements risk resulting in a major impact on trading bottom lines.
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