There are often questions about the difference between futures and CFDs, so let’s take a quick look at the key differences.

Main distinction between futures and CFDs

The main distinction between futures and CFDs is that you are entering into a contract to buy or sell something in the future at an agreed price with a future. At the same time, you never have to own any underlying asset with CFD trading. You are simply speculating on whether its value will rise or fall, but without ever having to deal with holding the physical support itself.

Different tax implications

It means that there are different tax implications for each type of instrument. With futures trading, you will be taxed on any gain made when your position has been ‘open’ for more than a year, whereas under UK law, CFDs can only incur taxation if the position has been open for less than a year.

CFDs don’t require collateral

Another important distinction is that, unlike futures, CFDs don’t require any collateral to be provided upfront when opening a position. With futures, you must provide at least 50% of the contract value as collateral when you place your order, but there is no initial margin requirement with CFDs.

 

It means you can enter into more prominent trading positions using CFDs than would be possible with futures contracts since you only need to deposit an amount equal to 1-5% of the trade value. The last key difference between futures and CFDs is how they are traded – with futures, you typically have to deal through a broker, so it’s impossible to trade directly from your account, whilst this is possible with CFDs.

So, what are the implications of all this for traders?

The main benefit of CFDs over futures is that they offer a much greater degree of leverage. It means that you can control a more prominent position with a smaller investment and have the potential to make more money on a given trade. However, it should be noted that this increased leverage can also lead to increased losses if the trade goes against you.

 

Another critical advantage of CFDs is that they are available to trade around the clock, 24 hours a day, five days a week. It’s not the case with futures trading, which only operates during certain hours on specific days of the week. It means you can react quickly to news announcements and other vital events in the financial world, and it can also be a benefit to traders who find it challenging to get time off work.

 

Futures trading is generally considered more suitable for experienced traders due to its complex structure and different tax implications. However, CFDs are also widely traded by professional investors and hedge funds, so there’s no reason why you shouldn’t give them a try!

Key distinction between futures and CFDs

With CFD trading, you never own any underlying asset. You are simply speculating on whether its value will rise or fall but without ever having to deal with holding the physical asset itself.

 

Another critical advantage of CFDs is that they are available to trade around the clock, 24 hours a day, five days a week. It’s not the case with futures trading, which only operates during certain hours on specific days of the week. It means you can react quickly to news announcements and other events in the financial world, and it can also be a benefit for traders who find it challenging to get time off work.

In conclusion

Futures trading is generally considered more suitable for experienced traders due to its complex structure and different tax implications. However, CFDs are also widely traded by professional investors and hedge funds, so there’s no reason why you shouldn’t give them a try!