CFD trading or futures trading? -SBF 120

If you have ever invested in the stock market, you have surely already heard of these products. But which one is the most interesting to use to optimize your investments?

Historical

The CFD is a derivative product created in 1990 in London, with the aim of effectively hedging the exposure of certain hedge funds on equities. At the same time, these products were offered to retail investors to buy and sell underlyings such as stocks, currencies or stock indices. Little by little, online brokers have expanded the offer of underlying metals, commodities, bonds, ETFs, and more recently cryptocurrencies.

The Futures market is much older. The first financial place of futures contracts was created in 1460 in Antwerp in Belgium and the first listing took place in 1592. This market was then developed in Amsterdam and then in Japan in 1730. It will be necessary to wait decades before seeing the birth of the first futures contracts. This took place in Chicago (by the CBOT (Chicago Board of Trades) with standardized characteristics (price, quantity, maturity). The objective at the time was to hedge its risk of rising or falling commodity prices to producers and retailers.

Similarities Between CFDs and Futures

These are two derivative products that are invested in margin. This means that on an amount invested, the investor will not have to block all this amount on his account but only a margin. This margin varies according to the product invested.

For example, on the CAC40 CFD, a €6,000 contract requires a margin of 5%, or €300. You therefore need a capital of at least €300 to be authorized to invest €6,000 in the CAC40.

The operation of margin call is also similar between the two products. When there is no more margin available to invest, one or more positions are closed automatically.

If you have a capital of €1,000 and you have a position on the CAC40 that blocks you a margin of €300, then you have €700 of available margin left. The margin call will trigger if you lose €700.

Leverage is the consequence of this margin trading, similar to these two products. Margin trading allows you to invest an amount greater than the capital in your account. However, there are differences between the two products on the amount of leverage allowed.

Finally, you can invest in both CFDs and Futures as an individual, with a online trading platform.

Leverage

Leverage is a tool that allows you to invest in the market without needing this amount of capital. You have to know how to use it wisely because it is a double-edged weapon. It can make you win a lot or lose a lot. To be consumed in moderation.

Regarding CFDs, a 2018 law by the regulator ESMA has standardized the leverage effect in Europe for all brokers, in order to limit the risk taken by individuals on the markets. The maximum leverage allowed now is 30 for currencies, 20 for indices, 10 for commodities, 5 for stocks and 2 for cryptocurrencies.

In the Futures market, it depends on the broker you go through. At FXFlat Bank, a German broker recently established in France, the maximum leverage authorized on the DAX40 Futures for example is around 200.

If you are looking for high leverage, the Futures market will be more interesting than CFDs.

However, it should be noted that on Futures, the margin doubles at night and on weekends. So pay attention to your overnight positions.

Advantages and disadvantages of CFDs

The great advantage of CFDs lies in the amounts invested, which are more suitable for retail investors. Indeed, it is possible to invest amounts from several hundred to several thousand without needing such a sum on its capital. When you have a capital of a few hundred or thousand euros in your account, it is generally more recommended to trade on CFDs because they allow better risk management, due to their low amount (ex: micro DAX at 0.10 € / item)

The other advantage of CFDs is the very wide range of instruments offered. It is indeed possible to invest in shares, cryptocurrencies or even baskets of sectoral shares such as the pharmaceutical sector, e-sport or even baskets of cryptocurrencies.

The main disadvantage of trading CFDs is the fact of trading on an over-the-counter (OTC) market, that is to say on the market of your broker and not on a centralized market. Thus, there may be conflicts of interest between the individual investor and his broker when the latter is crooked and is remunerated on the potential losses of his clients. This often happens with brokers based in Cyprus, Malta, Eastern Europe or even outside Europe.

To best avoid these conflicts, it is recommended to choose a broker in France whose execution is STP (straight through processing). Indeed, this execution guarantees that your broker is only remunerated on commissions and not on the potential losses of his clients. Even if the orders are executed at the broker, the latter will cover 100% of the positions with liquidity providers. This is the case for example of the broker FXFlat Bank, an STP broker whose offices are in France.

Finally, the last disadvantage of CFDs is what are called daily swaps. This is interest that investors pay when they keep their positions open overnight. Indeed, when you invest on margin, it means that you are borrowing money to open your positions on the market. This loan is charged with an interest called the swap. Even if these amounts are small, it can have a significant impact if we follow a long-term strategy.

Advantages and disadvantages of Futures

The Futures market was once reserved for institutional investors in terms of the amounts invested, but in recent years, the products have been increasingly adapted to retail investors.

It is a centralized market where all transactions take place in a single financial center. In Europe you have the EUREX to trade on the European indices (DAX40, CAC40, Euro Stoxx 50) and in the United States you have the CME for the US indices (Nasdaq, S&p500, Dow Jones), Forex (EUR/USD , USD/JPY) and commodities (gold, silver, oil, gas).

This is the whole point of this market, which is therefore more transparent with a single price for each instrument and no conflict of interest with its broker. Investors will appreciate access to volumes, market depth (DOM) and access to the order book in their analysis.

Given the large volumes traded on Futures, the commissions offered are very interesting to compare with CFDs.

Today, the EUREX and the CME offer products more suited to individuals with the creation of Mini contracts with which it is possible to invest at €1 per point on the DAX40 (€15,000 / contract) when in the past the only contract was €25 per point (€375,000 / contract).

However, this advantage must be qualified. Indeed, on micro-contracts, commissions are higher than on CFDs and liquidity is generally lower. If you want to speculate in the short term on the DAX40 or the Dow Jones, which are the two most speculated products, then the CFD will be more interesting from a cost and liquidity point of view.

People looking for the highest leverage will be better served with Futures which can offer leverage up to 100 depending on the broker. We must nevertheless be wary of the margins which double at night and on weekends.

Which broker to choose to trade CFDs and Futures?

The Futures broker offer is relatively poor in France. It is in the United States that you have to turn but often it is not possible to open an account as a French resident and customer service will only be in English. However, there are still a few serious brokers with customer service in French, such as Saxo Banque or FXFlat Bank, which has a very complete offer with its Trader Workstation and MT5 platform.

On CFDs, you have a very wide broker offer in France, with more or less serious offers. We particularly appreciate the offer of FXFlat Bank which is a serious broker, which has existed for 25 years and is regulated by the Bafin. With its 0 commission offer, especially on shares, 100% customer service in French with offices in Paris and a deposit guarantee of up to €500,000 per investor, FXFlat Bank seems to us to be the best offer. more complete on the French market today. You can test their free demo account for 30 days.

Conclusion

After this clear and complete review, we cannot decide for one or the other. There are pros and cons to both products. The choice will therefore depend on everyone, your investment style, your experience and the capital you invest.

CFDs are well suited to individuals who wish to speculate with small amounts over the short term and who are looking to diversify their investments across multiple markets. Futures, on the other hand, will be more suitable for long-term investors who have more substantial capital and who need access to volumes and order books in their strategy.

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