Futures Trading Accounts vs. CFD Trading

While contracts for difference, or CFD trading, offers traders access to a much wider number of things than futures markets do, a lot of CFD trading involves either trading futures or trading cash-based derivatives.

Many CFD brokers offer access to what is considered the cash market for indexes or other assets that are also traded on the futures market, but these are actually still derivatives, and are based upon the same underlying asset that futures trading is.

It is true though that trading cash derivatives eliminates the need to roll over contracts like futures contracts require, as well as futures based CFD trading, and one does not have to concern oneself with trading a certain contract expiring on a certain month either with cash derivatives, as cash based trading is of course continuous.

CFD traders can also place trades on futures contracts themselves, choosing which contract they wish to trade. They can also select that their positions be rolled over into future contracts if desired, and this is the option that just about all CFD traders will select, otherwise the positions may simply be closed on them if they wish by the CFD broker.

One of the things that are seen as a drawback with futures trading is the fact that contracts do end and do need to be rolled over, as traders do engage in actual futures contracts and these contracts do indeed expire.

While this is not a big deal at all or any deal for many futures traders, it does matter to some, especially those who are looking to carry positions over longer periods of time or even for briefer periods if the positions are taken near the end of a contract’s expiry.

There is not a similar option for futures trading as cash based indexes and commodities, and the cash market merely reflects what the value of the underlying assets are presently, and CFD brokers cover these positions not by buying individual components but by trading on the futures market.

Offering a cash market for these derivatives certainly can be a bit of an advantage to CFD traders though, and the value these derivatives represent is the pure present value of the underlying assets and not necessarily their value at a given point in time in the future, even though the time gap may not be very large.

Cash derivatives, with certain CFD brokers at least, tend to have even tighter spreads than futures based CFDs do, and spreads do matter a great deal. In most cases, it is better to trade cash rather than futures for this reason.

CFD Trading is Even Less Regulated than Futures Trading

Perhaps the biggest difference between futures trading and trading actual assets like stocks and bonds is that futures trading is considerably less regulated than stock and bond markets. It’s not that regulators wouldn’t like to regulate futures as tightly, and a tremendous fight ensued for many decades between futures exchanges and regulators, but in the end futures trading won out.

A lot of the differences between futures markets and the stock market for instance have to do with futures contracts not involving taking possession of anything, but instead being what essentially are wagers on the future price of something, the underlying asset.

This is what derivatives do, they are securities whose value is derived from the price of something else, and are pure securities in a real sense. Where actual securities denote ownership of an asset, derived securities do not denote any ownership other than owning and being responsible for the positions one takes in the market, the bets essentially.

Futures traders merely put up deposits to cover their losses with their bets, and their account balances are adjusted daily, provided they are still in the position and have not closed it, in which case their balances are adjusted according to the outcome of the trades.

CFD trades also involve placing bets, but instead of their being placed with other traders, CFD traders bet against the house, the CFD broker, who acts as the counterparty in the trades. CFD brokers may or may not take positions in the market to manage their exposure to the trades they take on with their clients, but whether or not this is the case is immaterial to the trades their clients make.

CFD brokers are regulated as well, but even less so than futures brokers and exchanges are. In a real sense, CFD brokers are the counterparty to the trade, the market maker, and the exchange, where the trades are all completely managed in house with no need for external liquidity, clearing, market making, or anything else.

There are several advantages to this, as this is the most efficient way to trade imaginable. The broker simply posts bids and asks and traders just click on them and the deals are done. As long as the CFD broker is able to meet all of their obligations, things run very smoothly, and the main concern of regulators is directed at their ability to do so, and to ensure that licensed brokers do have this means.

While futures traders may claim that their trades are cleared and regulated by exchanges, and this somehow reduces counterparty risk, it is only the fact that third party counterparties are involved that this is an issue, and we do need a means of ensuring that these counterparties will meet their obligations in a trade.

It’s actually simpler when there is no third party involved, such as is the case with CFD trading, it’s just you and the broker and no one else really, so this does remove some of the counterparty risk, the part that the exchanges are concerned with, and transfers it all to a more known source, the broker. Still though, the broker must be reliable, and some are better situated than others.

It does stand to reason that one should select truly reliable brokers when trading CFDs, and there are a lot of them out there in the market, with various degrees of financial stability, from extremely stable to relatively unproven and unknown.

Therefore, while it matters a lot to select a good futures broker, it matters even more to select the right CFD broker, for this reason and several other important ones.

CFD Trading Offers Much More Flexibility than Futures Trading

Futures trading is standardized, where one is committed to entering into a contract for a certain quantity of an asset, a lot or a mini lot. If one buys a lot of a futures contract, one buys exactly that, one lot worth, for the price that one pays for it in the market.

Since the broker is essentially the market, there is no such need or even purpose for standardizing CFD trades, and one can buy or sell virtually any quantity one desires, up to the limit of what is posted in the broker’s order book.

Since futures contracts involve trading with a third party, it is necessary to standardize these trades, much like it is with standardizing lots of shares that one buys and sells on the stock market.

Being able to customize one’s trade size is a real advantage to all traders, as one can enter into trades with the exact quantity one chooses, two and a half lots for instance instead of two or three, where going with two will make one’s position larger than desired and trading three larger than desired.

This ability to customize matters much more greatly to smaller traders though, and they may not even have the means to trade the asset due to not having the minimum deposit. They may also be forced into much larger positions than they are comfortable with or can trade safely, and this happens a great deal in the futures market.

This leads to the ultimate demise of many underfunded futures traders, and unless you are starting out with a lot of money and are already a good trader, this is not going to go well. If you aren’t well funded enough and/or don’t have enough experience or skill yet, learning in a manner that is very risky to extremely risky isn’t a particularly good path to take.

CFD trading allows traders to take positions for as little as a ten thousandth of a lot, and you can literally place orders with as little as a couple of dollars. Obviously, one is not going to make a lot of money with sizing this small, but one could if one wished.

Until a trader is at least fairly confident that they can trade profitably, and especially if one is losing money trading at the present time, trading larger is just going to magnify one’s losses. The ability to trade small, especially if one has a small amount of money to trade with, and even if one has a good amount of money but doesn’t know what he or she is doing yet, is a huge advantage indeed.

In a real sense, the futures market is for serious and accomplished traders, as well as those who are at least fairly well heeled, at least if one is seeking a positive expectation out of the trading.

How a trader gets to this point is the big question, and most traders are not going to get there by trying to learn in an environment that is simply not suited to them or one that they just do not have the means to participate in.

When one can essentially make the same trades as one can in the futures market, without the burden of the fixed commissions that futures trading involves, this can provide all the flexibility one needs to be a successful derivatives trader in time.

Many traders stick with CFD trading over futures trading after they have become accomplished enough, and the best CFD brokers offer very competitive trading costs over futures brokers even at the larger sizes, due to the commission free trading along with very competitive spreads that some CFD brokers offer.

It’s not that futures trading with futures brokers with orders placed directly on futures exchanges doesn’t have its place, but for most traders at least, CFD trading offers several advantages, and in some cases, some very necessary ones, and certainly should be at least looked at as a potential better alternative.