What are Futures and Contract for Differences (CFDs)?
(Futures, CFDs, Bonds and Swaps)
Futures markets trade futures contracts, which specify that the underlying index, currency, or commodity will be bought or sold for a specific price on a specific date in the future (known as the expiration date). Day traders trade futures contracts to make a profit on the difference between the buying price and the selling price, rather than to ever actually own the underlying commodity.
CFDs or contracts for difference offer an alternative way of trading shares and a host of other tradable financial investments with a much lower outlay and lower cost than investing in them directly. Instead of outlaying $6,000 USD for one oil contract, it could be as low as 1-5% of actual margin to trade CFDs.
While a lower outlay is a major feature of CFDs, another is that you can acquire CFDs with totally opposite investment performance expectations. There are CFDs that will profit when prices fall called short positions – and CFDs that will profit when prices rise, called long positions. And the financial commitment that is involved in trading one side or the other is very similar. In fact if you acquire CFD that will profit when prices fall short positions – you can even earn some extra income.
What is the contract and what is the difference?
A CFD in its most fundamental form is a trading product that allows you to buy something that will hopefully make a profit but may also suffer a loss that mirrors the performance of owning an investment as a direct investor. But it all happens without you actually owning the investment.
What you have is a contract with a CFD provider who agrees to deliver any profit you may earn as the difference between owning the investments and having an interest in a CFD. Your side of the bargain is to come up with the money and pay the difference if the trade goes against you.
Why invest in Futures and CFDs?
Futures give traders the potential to gain large profits with only minimal initial margins; by using the power of leveraging, you can trade contracts at low costs and reap the profits of a well predicted price movement in the market.
On the flipside, if the market moves against your speculations, then the losses made on your investment may be substantial. Investing in futures can provide traders with either generous profits or considerable losses; thus, we recommend them for seasoned investors with a high tolerance for risk.