What are CFDs?
CFDs are products that allow traders to theorize on the price of assets without owning the underlying asset. They are traded over the counter (OTC), which means they are not listed on any formal exchange.
How do CFDs work?
When you buy a CFD, you enter into a contract with your broker. You agree to pay the broker the difference between the price you buy the CFD and the price you sell it. For example, if you buy a CFD at $100 and sell it at $105, you will have made a profit of $5
CFDs can be used to trade a wide range of assets, including stocks, indices, commodities and currencies.
What are futures contracts?
Futures contracts are financial contracts that allow traders to buy or sell an asset at a set price on a future date. Futures contracts are standardized, meaning that the terms and conditions of the contract are fixed by the exchange on which they are traded.
How do futures contracts work?
When buying a futures contract, you agree to purchase an asset from the seller at a set price on a future date. For example, if you buy a futures contract for $100 oil, you will agree to purchase one barrel of oil from the seller at $100 per barrel on a future date. Futures contracts can be used to trade a wide range of assets, including stocks, indices, commodities and currencies.
CFDs or futures contracts: which is better?
There’s no easy answer when deciding whether CFDs or futures contracts are better. Both products have their advantages and disadvantages, which you need to consider before deciding.
Some of the critical factors to consider include:
Liquidity
Liquidity is one of the critical factors to consider when choosing between CFDs and futures contracts. CFDs are traded over the counter (OTC), which means they are not listed on any formal exchange. It can make them less liquid than futures contracts traded on exchanges.
Cost
Cost is another essential factor to consider. Trading fees and commissions can vary significantly between brokers, so you need to compare costs carefully before deciding.
Flexibility
Flexibility is another essential factor to consider. CFDs can be traded on margin, which means you can trade with a smaller deposit than you would need to trade the underlying asset. Futures contracts are not traded on margin and require a larger initial deposit.
Risk
The risk of losing money is another crucial factor to consider when choosing between CFDs and futures contracts. CFDs are a high-risk investment and can result in significant losses if the market moves against you. Futures contracts are less risky than CFDs and have lower potential losses.
Ease of use
Ease of use is another crucial factor to consider. The trading platform should be easy to use and navigate. Access to customer support is also vital if you have any questions or problems.
Regulation
The regulation of the broker is another critical factor to consider. Brokers are regulated by financial regulators, such as the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the US. It would be best to only trade with brokers that a financial regulator regulates.
Reputation
The reputation of the broker is also important. Check online reviews and independent ratings to see what other traders think about the broker.
In conclusion
Ultimately, deciding which product is better for you depends on your individual needs and preferences. Consider all factors listed above before making a decision. There is no easy answer when deciding whether CFDs or futures contracts are better. Both products have their advantages and disadvantages, which you need to consider before deciding. Visit the company website to find out more.
