Contracts for difference (CFDs) are a very accessible start off in trading. We have explained why in our previous articles. They are not the only options for newbie traders, however. There are still plenty of options to choose from for any budding trader, with similar advantages. These are mainly other derivatives. Here, we will start comparing such contracts against CFDs.
Forwards and futures contracts
Forwards are the most simple type of contract, or derivative, out there. Here, people set up a date that they want to trade an asset on. They then speculate what the price of the asset would be at that point in time. They will put this speculative price as the future price on the contract.
There are similar contracts called futures contracts. The only difference is that one can find them on an exchange. This means futures are standardised and all the details of the contracts are ironed out. This means that traders are sure there will be no hiccups in their trade.
These sorts of contracts allow sellers not to worry about the future price of their asset. This is especially true in the commodity market, where it takes some time to produce an asset. Therefore, sellers want to make sure that they can trade their asset beforehand.
Futures compared to CFDs
The first obvious difference between CFDs and futures is the date. CFDs have no set date, whereas futures do. CFDs are therefore more flexible. If things go dire, you just have to wait for them to improve.
CFDs can also be used for any asset. Futures are mainly for agricultural products, things people take time to produce. More importantly, with CFDs, you do not have to own the asset.
CFD prices also follow market prices, unlike futures.
Overall then, CFDs and futures are not really for the same purpose. CFDs are for profiting off of price differences of an asset. Futures are there to ensure trades go through in advance.