• August 27, 2021

Understanding CFD Future Trading

Jargon in the financial world can be difficult to understand especially for a newbie. A new trader must understand the meaning of financial terms and the different means of trading. This knowledge enables them to make informed decisions about where and how to invest and which specific instruments of trading would be beneficial.

If you are looking to trade within a wide range of markets there are several trading options available. It is easy to be confused when presented with trading methods because they often seem so similar. A little research can help with understanding some of these terms a little better.

What Are CFDs?

Contracts for difference (CFDs) are financial derivatives. They allow investors to speculate and predict the value of underlying assets in the future for a potential profit, without having to own any asset.

Profit and loss margins are calculated by the difference between the opening and closing prices of your position.

What Are Futures?

Futures are contracts where a buyer and seller agree to exchange an underlying asset at a future date, for a price agreed upon earlier. A future contract requires a buyer to purchase the underlying asset and the seller will also be obligated to sell the underlying asset, before or when the contract comes to an end for a predetermined price.

When prices within the market or underlying assets are expected to rise, futures can be used to hedge against them. For instance, the prices of oil might be expected to rise, an airline company may opt to hedge against this by being oil futures. Doing this will lock prices at the predetermined level even though the prices within the market for that underlying asset rises.

Trading CFDs On Future Prices

CFDs and futures allow an investor to trade within a wide financial market range. Some of these markets include bonds, equities, cryptocurrencies, indices, shares, forex and so many more.

Normally, trading CFDs is considered to be more flexible than choosing to trade futures directly. Some brokers allow investors to trade CFDs on future prices.

Trading in CFD futures will act in the same way trading on a future within the underlying market would. The only difference would now be that investors will be able to trade on rising and falling prices, without having to bear the obligations the future contracts would normally entail.

Trading futures with CFDs also allows investors to speculate on conditions in the market. This allows the traders to go long when they think prices will go up and go short when they think prices will go down.

Advantages of Trading CFDs

  1. Investors can go long or short based on speculative predictions.
  2. Positions are opened using leverage and therefore, chances of gaining larger profits are higher.
  3. Allows investors to trade in a wide variety of financial markets giving them several options to choose from.

Advantages of CFD Future Trading

  1. Futures are traded on open and public exchanges which creates price transparency.
  2. They are often sold in large quantities in a largely liquid market which makes it beneficial for large scale buyers.
  3. Investors can trade within a wide marketplace and can choose based on need and preference.
  4. Investors can go long or short based on speculative predictions.
  5. There are no overnight funding charges for futures.
  6. Positions are opened using leverage and therefore, chances of gaining larger profits are higher.

Disadvantages Of Futures

  1. Future trading contracts have an expiration date and this makes them less flexible than CFDs.
  2. Futures can be limiting in terms of what kind of investors can trade. There are many barriers to entry especially minimum prices that keep small traders away.
  3. The risks involved are quite high. This is due to the use of leverage together with other factors such as expiration dates. This means that investors could potentially lose a lot more than their initial investment.

Wrapping It Up

There are many similarities between contracts for difference and futures. They similarly have differences that should be considered before deciding which of the two should be used for trade. There are several advantages to using CFDs on future prices and this is an option that traders should consider. They are both equally high risk and it is wise to manage those risks as much as you can before trading.