Futures are another form of derivative, while inconsistent in specifics across the world’s exchanges they are still a highly traded product and hold many similarities to CFDs. In layman’s terms a future is typically a contract set in place to purchase an asset, in the future, at a set price. Futures can be created on almost any asset, just like a CFD. The most commonly found form of Futures are Equity (Share) Futures. There are 3 main differences between futures and CFDs these being, liquidity, expiry dates and financing costs.
Liquidity is an issue for almost all futures markets bar OneChicargo (the largest US based futures exchange). They have become infamous for slippages on price and bad execution. This is a direct result of the poor liquidity found in their underlying market (eg the SFE). Since futures are an exchange traded product, they require a buyer and seller for every transaction, if there is no counter partner to fill the order it is up to the market maker to step in and fill the order. Since market makers cannot easily accumulate or dispose of their net positions (due to the small amount of transactions on the exchange) they have to offer wider spreads to traders in order to stay in business. The larger spread causes more volatile movements in the price of the derivative thus more slippage and lower profits.
CFDs on the other hand have an almost infinite amount of liquidity. Since they are not an exchange traded product, you are guaranteed to fill your order at the requested price by your provider. Not to say slippage doesn’t occur, it can be a big problem, but this is usually due to the synthetic price determination of the market maker (see above), not due to the lack of participants. And since providers are pressured by customers to provider tighter spreads, this is becoming less of an issue for CFD traders.
Expiry Dates are another big difference CFDs have to futures. Expiry dates exist on futures because in the traditional sense, this is the date that the asset has to be delivered and the agreed price. Since most futures contracts are closed out before the expiry date occurs, the asset doesn’t physically get delivered but technically there is still one in place. This supports the financial markets and allows people who actually want to own the share (or other asset) the ability to obtain it.
CFDs are priced as daily contracts that roll over every night. So if the decision to hold the CFD over night is made, the position is closed, financing, dividends and other charges/distributions are paid out and the position is rolled into the next day as a new holding
Financing is the third differentiator to of Futures and CFDs. CFD financing has been covered above and as discussed is paid in cash on all holdings held over night. Since futures are leveraged product, financing costs are inevitable. The difference with futures is that the financing cost is calculated into the price of the future and is represented in the difference in the price of the future against its underlying asset; this cost is referred to as the ‘cost of carry’. This cost of carry is usually determined by a premium or discount rate of 1 or 2 percent above or below the central banks underlying cash rate.