What is the Difference Between Futures & CFDs?

By NinjaTrader


A contract for difference (CFD) is a contract between a trader and a CFD broker that stipulates the buyer will exchange the difference in the value of a financial product between the time the contract opens and closes to the seller, the CFD broker.

Futures are a derivative financial product that stipulates the buyer will purchase an asset or the seller to sell an asset at a predetermined future date and set price.

From a trading perspective, contracts for difference (CFDs) and futures are very similar markets. In both cases, it is just as easy to go long or buy a market you believe will go higher, and go short or sell a market you believe is going lower. The reason for this, unlike the stock market, is when a participant enters a trade, they are not actually buying or selling the underlying asset, they are simply taking a position based on their opinion on the belief of which direction they think the market will move.

With both futures and CFDs, a trade is matched between a buyer and a seller. For every tick the market moves, one side is gaining the exact amount the other side is losing. At the end of the trade, if one side has made $100, the other side has lost $100 therefore, the combined net gain and loss equal zero. This flexibility to act on an opinion for the market to move either up or down makes both futures and CFD’s popular choices for day traders.


What’s the Big Difference: CFDs and Futures

The biggest difference between CFDs and futures markets lies within the overall structure of these markets.

CFDs – CFDs are available internationally on a wide array of markets such as commodities, stock indices, currencies and in some cases, single stocks.

When trading CFDs, there is no centralized exchange. These instruments are almost exclusively traded OTC or “over-the-counter”. This means when an investor places a trade, they are executing that trade against the broker with which they have opened the account. The broker in this case is effectively a bookmaker who is taking the other side of the trade based on which direction they believe the market is going. Brokers internalize all of these orders and try to maintain a balance of both buyers and sellers, collecting a ‘spread’ along the way.

This market structure creates many questions regarding a potential conflict of interest and how to ensure a broker is working in the best interest of the client. These concerns are some of the primary reasons why CFD trading is unavailable in the United States.

Futures – Futures are also offered on a very wide array of markets comparable to CFDs however, all trades are executed on a centralized exchange such as Eurex or CME Group.

The important role of tightly regulated futures exchanges cannot be overstated. They provide an unbiased venue in which buyers’ and sellers’ trades can be matched based on publicly available rules, price & liquidity transparency, and anonymity to name a few of the many benefits.

Regulated brokers, such as NinjaTrader, also play a very important role in the execution of trades. In the world of futures trading, unlike with CFDs, brokers do not trade counter their clients. Rather they exist to provide access to the exchanges and provide the best possible execution services to their clients. Futures brokers do not make money when their clients lose money. As such, their interest rests solely on providing the best possible trading experience & support for their clients.


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