The main difference between CFDs (Contracts for Difference) and futures is how they are structured, as they both essentially do the same things but in different ways. In this guide, I’ll go through whether futures or CFDs are best for different types of trading.
What are CFDs & Futures
CFDs are contracts for difference, which is an agreement between you and a broker to exchange the difference in price of an asset between when you open and close the trade. No actual ownership or delivery of the underlying asset.
A future is a standardised contract to buy or sell an asset at a set price on a specific future date.
Those are the official descriptions, but in reality, a CFD is a product you trade with your broker, because your account is too small to trade futures. Retail traders tend to trade CFDs as they are more flexible than CFDs. For instance, the FTSE future, contract spec (on ICE) is £10 per index point, so based on the currently FTSE price of 8,416 one contract is worth £84,160.
But with CFDs you can trade UKX or the UK100 for as little as £1 per index point.
Incidentally, the reason brokers call FTSE CFDs UKX or UK100 is because they have to licence the FTSE trademark to use them on their platform, which is very expensive (about £50k a year when I last checked). As far as I know ,the only broker to offer FTSE 100 CFDs is IG.
Talking of IG, this is where it gets a little more complicated because, as well as offering Cash FTSE 100, they also offer CFD Futures. But these are not real futures, as they are not traded on exchange, they are futures derivatives that are based on the FTSE future forward price.
Futures are traded in quarters or months and IG, so the June future price would be higher than the daily price, which is based on the underlying index price.
The forward price is calculated based on how much it would cost to borrow money unilt the expiry date of that future.
On-exchagne Versus OTC
CFDs are traded over the counter (OTC) through CFD brokers (like IG, CMC, etc.) so your counterparty risk is with them. They decide the price, if you can deal and what the margin rates are.
Futures are traded on regulated exchanges (like CME, ICE, etc.) who act as a central counterparty to lots of different brokers who all feed their orders in. So if a broker defaults your position is still held at the exchange. It also means there is often greater liquidity, meaning orders can be filled quicker.
Leverage and Margin
CFDs typically offer more flexible leverage, and margin requirements can vary between brokers. Leverage is capped in the UK by regulators for retail clients, but for professional clients, brokers can choose their own margin levels.
Futures, however, have fixed margin requirements set by the exchange and must be met by the brokers offering their contracts to customers. However, brokers can reduce margin for day traders who are flat by the close by (usually) around 50%. As there is a lot more risk in holding a position overnight compared to during normal market trading hours.
Expiry
Futures have a fixed expiry date and are settled either by physical delivery or cash. Which means that cash-settled futures (normally on indices) just result in a profit or loss. Whereas a physically delivered future (like gold or oil) can be delivered. If you hold a futures position to expiry, you will have to accept delivery of what you have traded.
This was the original purpose of futures, it was to enable farmers to sell crops they were growing for a set price in the future. When the crops were grown, they would deliver them to the buyer who had already paid a deposit, with the full amount due on delivery.
CFDs generally don’t expire and you can keep the position open as long as you want, however, some expire automatically at the end of the day, of if they are a CFD based on a future, they expire quarterly or monthly. As a customer, your broker will also give you the option of automatically rolling a position. But holding CFDs in the long term can be quite expensive. Plus CFDs are always cash settled.
Costs
CFD dealing fess are usually included in the bid/offer spread which will be slightly wider than the underlying market. CFD traders are also charged overnight funding fees each day. After about a month this works out more expensive than paying stamp duty on UK shares which you don’t have to pay on CFDs as you do not own the underlying stock or asset.
But, in some circumstances, if you are trading DMA CFDs, you will pay commission after trading as if you are working orders inside the bid and offer on the exchange; you need to be trading at live prices.
Futures brokers charge commissions + exchange fees, but no overnight financing since contracts expire.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
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