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What is the Difference Between a CFD and Futures?

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  • Written By: Ben Taylor
  • Edited By: A. Joseph
  • Last Modified Date: 15 September 2016
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A contract for difference (CFD) is an agreement between buyers and sellers of a security. A CFD is a clause within a futures contract that stipulates that the buyer will pay the difference between the asset's market value at the time of sale and its value at contract time — or if the difference is negative, the seller pays the buyer. Futures contracts without a CFD represents an agreement to buy or sell a particular commodity or financial instrument at a predetermined price in the future. An important different between CFD and futures is that a CFD is available on a futures contract only in certain countries, including the United Kingdom, Netherlands, Poland, Singapore, Japan and Australia, to name a few. Futures without a CFD are available in markets all over the world.

Both futures with a CFD and futures without a CFD allow for financial speculation regarding a specific commodity or financial instrument. If an investor buys a security or financial derivative with the expectation that the future value will be greater than the present value, the investor takes a long position; a short position means the investor believes the future value will be less than the present value. As pertains to a CFD and futures, investors who are pessimistic about a security's future value take a short position and sell futures contracts. Most investors take long positions regarding a CFD and futures.

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Futures without a CFD can be settled either in cash or by delivering the security, and they aim to ensure the quality and quantity of the underlying asset. They are standardized in order to facilitate trade on a futures exchange. A CFD and futures both allow financial speculation and day trading, because some investors buy and sell CFDs and futures with no intention of ever buying the underlying securities.

A CFD offers the benefit of owning the security with a fraction of the cost. In markets where CFDs can be traded, they mimic any stock or index. Many investors day trade in CFDs, as they do in futures, but CFDs tend to move quicker and expose investors to less risk. CFDs are better suited for day traders because both CFDs and day trading are fast-paced, short-term investments. Futures without CFDs are also fast-paced, but not to the degree that CFDs are. No matter whether day traders use futures or futures with CFDs, speculation from intraday traders in the commodities market comprises the bulk of market activity and helps set the price for the world's commodities.

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