What is the difference between CFDs and futures?

The key difference between CFDs and futures is how each derivative works. While they both enable you to take a position on a variety of financial markets, they do so in very different ways. Read on for an explanation of CFDs and futures – including which might be best for you.

What are CFDs?

CFDs are contracts for difference, financial derivatives that enable you to go long or short on an underlying market without buying or selling the asset you’re trading. Instead, you trade a contract that mimics your chosen market.

How CFDs work

CFDs work using contracts in which you agree to exchange the difference in an asset’s price from when you opened your position to when you close it – hence the name, contracts for difference. The CFD you trade always exactly mimics the price movements of its underlying market, enabling you to trade thousands of assets without ever owning them.

When you buy a CFD, you exchange any upward price movement in your market as profit, but pay any downward movement as loss. However, because you don’t own the asset, you can also sell CFDs. Here, you make any downward movement as profit and upward movement as loss.

Another key benefit to CFDs is leverage. When you trade a contract for difference, you don’t have to pay for the full value of your position upfront. Instead, you only need a deposit in your account known as your margin. This frees up capital to use elsewhere.

CFD example

Say you buy an ExxonMobil CFD when the stock is at $100, then sell it at $120.

Your CFD entitles you to exchange the $20 price difference, earning you the same profit as if you’d bought the share via a broker. If ExxonMobil falls to $80, then you still exchange the price difference, but this time you pay your provider. This means you make a $20 loss.

As you may have noticed, this works a lot like trading ExxonMobil shares via traditional investment. That’s by design. A CFD is intended to work in a similar way to its underlying, acting as the closest approximation to trading the markets without actually buying and owning stocks, commodities, currencies and more.

See more CFD examples.

What are futures?

Futures are financial derivatives that also work as contracts. But with a future, you’re agreeing to trade an asset on a set date at a set price. In some futures contracts, you will end up owning the underlying market, while others are settled in cash.

How do futures work?

Futures work by setting out the parameters of a trade well before the trade itself actually takes place. Originally, they were used by producers and consumers to guarantee the prices of products that took a long time to make or grow – by setting a price for your product today, you can protect your profits against volatile pricing.

Today, futures are just as popular among traders. This is because the value of a futures contract will change depending on whether the trade it outlines is better or worse than the current market price.

Typically, the cost to buy a future will be lower than the cost to make the trade set out in the contract. Because of this, futures are also leveraged.

Futures example

A futures contract, for instance, might dictate that you have to buy 100 oz of gold at $1,900 at the end of February. Whatever the market price of gold is on that date, you’ll have to buy it for $1,900. If gold is worth $2,000, you can get a $100 discount; if gold is at $1,800, you’ll pay a $100 premium.

You don’t have to hold your future until it expires at the end of February, though. You could sell it to someone else beforehand, meaning they have to make the trade instead. If it looks likely that gold will be worth more than $1,900 at the end of Feb, then your future will be worth more. If gold is below $1,900 and heading down, your future will be worth less.

This is how speculators can use futures to take a position on financial markets. They don’t necessarily have to make a physical trade at the end of the transaction, either – lots of futures are settled in cash, which means the two parties exchange the difference between the market price of the underlying instead.

Futures vs CFDs: differences in detail

As we’ve seen, the key difference between CFDs and futures lies in how the two work:

  • CFDs mimic the prices of their underlying, enabling you to trade on an asset’s price movement without owning it
  • Futures bind two parties to make a set trade, and their value changes based on whether that trade looks profitable or not

However, this means in practice there are lots of other smaller details to be aware of too. Let’s examine some of the main ones:

  CFDs Futures
Expiries CFDs do expire, but you can usually roll over your position to keep it open indefinitely Futures expire on a set date, upon which the transaction must be executed
How they’re traded CFDs are traded over the counter (OTC), usually between you and your provider Futures trade on futures exchanges, so you’ll need an account with a futures broker to trade them
Range of markets You can trade a huge range of markets with CFDs, including stocks, ETFs, currencies, indices, commodities and bonds You can usually trade futures on commodities, indices, currencies and bonds
Contract sizes As they are traded OTC, CFDs come in flexible sizes Futures trade in standardised amounts

Benefits of CFDs and futures

CFDs and futures both come with significant benefits and risks, so it pays to be careful when choosing which is best for you. Here are a few points to consider:

CFDs could be for you if you want… Futures could be for you if you want…
A product that closely resembles its underlying market To trade on exchanges
To trade stocks and ETFs as well as currencies, indices or bonds To focus on commodities, indices, currencies or bonds
To trade in flexible sizes Standardised contract sizes
Not to worry about expiries To take a longer-term position

Not sure either CFDs or futures are best for you? You might want to read more about options.

Can I trade CFD futures?

Yes, with a City Index account you can trade on the spot or futures price of lots of different markets. This gives you complete flexibility on how you want to take your position.

To start trading today follow these steps:

  1. Open your City Index account and add some funds
  2. Log in to our Web Trader platform, or download our mobile trading app
  3. Search for your chosen market
  4. Choose ‘buy’ to go long, or ‘sell’ to go short

Or if you’re not yet ready for live trading, you can get started with a risk-free City Index trading demo. This gives you access to our full range of markets, but with virtual funds instead of your own capital.

CFDs vs futures FAQs

Are CFDs the same as options?

No, CFDs aren’t the same as options. Options give you the right to buy or sell an asset at a set price before the option expires. Unlike futures, you don’t have to make the transaction – if you want, you can let the option expire worthless.

Learn more about CFDs vs options.

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Are CFDs better than futures?

CFDs aren’t necessarily better than futures. They both cater to different types of trader, with unique benefits and drawbacks. Take a look at our CFDs vs futures comparison table for a breakdown of which derivative might be better for you.

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Why are CFDs more risky than stocks?

CFDs are more risky than traditional stock trading because of leverage. CFD leverage enables you to trade stocks without paying for their full value upfront. But because your profit or loss is based on the full size of your position, you can see outsized returns and risks.

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