New to trading and trying to decide between CFDs and futures?
I'll walk you through the advantages and disadvantages of each so you can make a more informed choice.
What is a CFD?
A CFD (contract for difference) is an agreement between a trader and a broker that lets you speculate on an asset rising or falling without ever owning it.
When you buy a gold CFD, for example, you don't own any gold. You're simply betting on the price movement.
Your profit or loss is the difference between your position's opening and closing prices.
It's simple, straightforward and very accessible to retail traders.
The main features of a CFD:
- You never own the underlying asset
- You can speculate on rising or falling prices
- You trade through a CFD broker, which acts as your counterparty
- Leverage, often at very high levels, is commonly available
What is a futures contract?
A futures contract is a standardised contract traded on an organised exchange such as CME or Euronext.
It allows an asset to be bought or sold at a predetermined future date and a price agreed in advance.
For example, a wheat futures contract for delivery in 6 months at €1,000 per tonne.
Futures can also be used to lock in a future price, particularly in commodity markets.
The main features of futures:
- Contracts are standardised, including quantities and delivery dates
- They trade on centralised, regulated markets
- You can buy or sell them to speculate or hedge
- Leverage is available but subject to strict rules
CFDs vs futures: the main differences
| Feature | Futures | CFDs |
|---|---|---|
| Market | Organised, centralised market | Product offered by a broker |
| Contract | Standardised | Terms set by the broker |
| Counterparty | Market / clearing house | CFD broker |
| Costs | Commissions, exchange fees and possible rollover costs | Spread, commissions and overnight fees |
| Capital required | Often higher | Often more accessible |
| Transparency | Prices from a centralised market | Prices depend on the broker |
| Tools | More specialised platforms | Often simpler platforms |
| Typical use | Traders seeking more transparency and access to the underlying market | Beginners or traders with more limited capital |
Fees
CFDs involve three types of costs:
- The spread: the difference between the price you buy at and the price you sell at
- A commission: some brokers charge a fixed amount or a percentage on each trade
- Overnight financing: you pay a daily fee if you keep a position open past a time set by your broker. These fees remain small
Futures also involve three types of costs:
- A commission per trade, for example $1.50 for an E-mini S&P 500 contract
- Clearing and exchange fees, around another $1 to $2 per contract
- Rollover: as expiry approaches, you can either close your position or roll it into the next contract. This can involve a spread based on the price difference between the old and new contracts
Capital requirements
Some CFD brokers accept small deposits, sometimes starting at €200.
Futures require a larger capital reserve to cover margin calls.
A margin call is when your broker asks you to add money because your account no longer has enough funds to cover your losses.
If you don't meet the margin call, the broker automatically closes your position. The exact amount depends on the contract and market conditions.
Transparency
Futures offer full transparency because prices are determined by supply and demand on centralised, regulated markets.
That means everyone sees the same prices and manipulation is almost impossible.
With CFDs, things are different: your broker is your counterparty, which can create conflicts of interest.
Some unscrupulous brokers may manipulate prices to make you lose, for example by artificially triggering your stop loss or widening spreads during periods of high volatility.
These practices are, of course, illegal.
Leverage
CFDs often offer very high levels of leverage.
Futures also involve leverage, but it's more moderate and subject to strict rules.
The underlying market and the synthetic market
When you trade futures, you participate directly in the "real" market.
Your actions have an actual impact on prices and traded volume.
With CFDs, you aren't trading directly on the underlying market.
Your broker is your counterparty, and your trades have no impact on the real market.
Futures markets close at weekends, whereas some CFD brokers let you trade during those periods too.
Trading tools
For futures, you'll often need specialised tools such as NinjaTrader or Sierra Chart.
These professional tools take time to learn and require a good level of technical understanding to use effectively.
With CFDs, things are much simpler.
Most brokers offer intuitive platforms such as MetaTrader or their own web interfaces.
CFDs or futures: which should you trade?
If you're just starting out with a small amount of capital, CFDs are probably the better option.
They're easy to use, accessible and let you trade a wide range of assets.
Choose your broker very carefully to minimise counterparty risk.
If you have more capital and want lower trading costs, futures are a good alternative.
They offer full transparency and give you access to the real market.
If you're prepared to spend time understanding the complex workings of financial markets, futures can offer you more control and security.
The best thing to do is try both instruments and see which suits you.
How I choose between CFDs and futures
Personally, I choose according to the trading strategy I'm going to use.
When I want to scalp, meaning very tight trades lasting a few seconds or minutes, I go for futures.
That's because commissions are low or very low, and there is almost no spread.
When I want to trade crypto or hold positions for longer, I tend to use CFDs instead.
