Though futures as a product are pretty similar to that of CFDs, when compared with CFD advantages, they have some catching up to do.
These are in terms of liquidity, cost of financing and the expiry terms.
Futures too are contracts that can be used to purchase any stock, commodity, bonds or foreign exchange at a price and depending on the market movement; you can win or lose money.
Futures suffer from inadequate liquidity due to frequent slippages in their prices as well as execution problems.
That is because they are traded on the exchange and would require a buyer as well as a seller for each transaction to take place.
If there is no buyer or seller for a particular transaction, then the market maker steps in and has to conclude the order.
Since it is difficult for market makers to always dispose off their positions on time, they as an incentive offer higher spreads to market participants and this leads to very frequent price slippages making the price discovery of the derivative as compared to the underlying a difficult one.
It also leads to lower profits.
CFD advantages on the other hand mean that liquidity is not a problem at all as they are not traded on the exchange.
When you place an order, it is sure to be executed at the price you want and that is done by the CFD provider.
Here too, price slippages can take place but that is mainly due to the synthetic pricing fixed by the market maker and not because there are lesser number of participants.
Moreover, in this case, the providers are always pressurized by their customers to provide even tighter spreads and therefore the chances for any losses are minimized.
CFD advantages also become obvious because of their very close linkage with the underlying price and that means you would be able to come to a fair idea about your CFD portfolio valuation through a comparison of the prices of the underlying.
The prices of the underlying are displayed very commonly and therefore it is easier to estimate as well as analyze your CFD portfolio.
While on the subject of derivatives, it is worthwhile mentioning that there are similarities between options trading and CFDs since both facilitate leverage and also enable the taking of short positions by the trader to benefit from a falling market.
But that is where the similarities end.
These are in terms of liquidity, cost of financing and the expiry terms.
Futures too are contracts that can be used to purchase any stock, commodity, bonds or foreign exchange at a price and depending on the market movement; you can win or lose money.
Futures suffer from inadequate liquidity due to frequent slippages in their prices as well as execution problems.
That is because they are traded on the exchange and would require a buyer as well as a seller for each transaction to take place.
If there is no buyer or seller for a particular transaction, then the market maker steps in and has to conclude the order.
Since it is difficult for market makers to always dispose off their positions on time, they as an incentive offer higher spreads to market participants and this leads to very frequent price slippages making the price discovery of the derivative as compared to the underlying a difficult one.
It also leads to lower profits.
CFD advantages on the other hand mean that liquidity is not a problem at all as they are not traded on the exchange.
When you place an order, it is sure to be executed at the price you want and that is done by the CFD provider.
Here too, price slippages can take place but that is mainly due to the synthetic pricing fixed by the market maker and not because there are lesser number of participants.
Moreover, in this case, the providers are always pressurized by their customers to provide even tighter spreads and therefore the chances for any losses are minimized.
CFD advantages also become obvious because of their very close linkage with the underlying price and that means you would be able to come to a fair idea about your CFD portfolio valuation through a comparison of the prices of the underlying.
The prices of the underlying are displayed very commonly and therefore it is easier to estimate as well as analyze your CFD portfolio.
While on the subject of derivatives, it is worthwhile mentioning that there are similarities between options trading and CFDs since both facilitate leverage and also enable the taking of short positions by the trader to benefit from a falling market.
But that is where the similarities end.