If you have ever invested in the stock market, you must have already heard of these products. But which one is the most interesting to use to optimize your investment?
historical
CFD is a derivative product developed in London in 1990, aimed at effectively hedging certain hedge fund exposures to equities. At the same time, these products were offered Retail investors To buy and sell underlying things like stocks, currencies or stock indices. Little by little, online brokers have expanded their offerings to underlying metals, commodities, bonds, ETFs and, more recently, cryptocurrencies.
The futures market is very old. The first financial venue for futures contracts was created in 1460 in Antwerp, Belgium, and the first listing took place in 1592. This market was then developed in Amsterdam and then in Japan in 1730. The first futures contract would have to wait decades before it was born. It was held in Chicago by CBOT (Chicago Board of Trades) with standardized characteristics (price, quantity, maturity). The purpose then was to hedge the 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 the amount invested, the investor does not have to block all this amount in 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. So you need at least €300 capital to be allowed to invest €6,000 in CAC40.
its operation Margin call The same is true between the two products. When no more margin is available for investment, one or more positions are automatically closed.
If you have a capital of €1,000 and you have a position in CAC40 that blocks you a margin of €300, you have €700 of available margin left. A margin call will be triggered if you lose €700.
Leverage The result of this margin trading is similar to these two products. Margin trading allows you to invest more than the capital in your account. However, there is a difference between the two products in the amount of leverage allowed.
Finally, you can invest in both CFDs and futures as an individual, with 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 A double-edged sword. It can make you win a lot or lose a lot. Consume in moderation.
2018 Act of the Regulator, relating to CFDs SMA Standardized the leverage effect in Europe for all brokers to limit the risk taken by individuals in the market. Now the maximum leverage allowed is 30 for currencies, 20 for indices, 10 for commodities, 5 for stocks and 2 for cryptocurrencies.
In the futures market, it depends on which broker you go through. At the recently established German broker FXflat Bank in France, for example the maximum leverage allowed on DAX40 futures is around 200.
If you are looking for high leverage, the futures market will be more attractive than CFDs.
However, it should be noted that in futures, the margin doubles at night and on weekends. So pay attention to your overnight position.
Advantages and Disadvantages of CFD
The major advantage of CFDs is in the amount invested, which is more suitable for retail investors. In fact, it is possible to invest hundreds to hundreds of thousands without needing such money on its capital. When you have a capital of several hundreds or thousands of euros in your account, it is generally recommended to trade in CFDs because they allow better risk management due to their low volume (eg: Micro DAX 0.10 € / item)
Another advantage of CFD is the wide range of instruments offered. It is indeed possible to invest in shares, cryptocurrencies or even a basket of sectoral shares like the pharmaceutical sector, e-sports or even a basket of cryptocurrencies.
The main disadvantage of trading CFDs is trading in an over-the-counter (OTC) market, i.e. your broker’s market and not a centralized market. Thus, there may be a conflict of interest between the individual investor and his broker when the latter is crooked and remunerated for potential losses to his clients. This often happens with brokers based in Cyprus, Malta, Eastern Europe or even outside Europe.
To avoid these conflicts, it is recommended to choose a broker in France whose implementation is STP (straight through processing). In fact, this execution ensures that your broker will only be remunerated on commission and not on potential losses to his clients. Even if the order is executed at the broker, the latter will cover 100% of the position of the liquidity providers. This is an example of broker FXFlat Bank, an STP broker with offices in France.
Finally, the last disadvantage of CFDs is what is known as daily swaps. This is the interest that investors pay when they keep their positions open overnight. In fact, when you invest on margin, it means you are borrowing money to open your position in the market. This loan is charged with an interest called swap. Although these amounts are small, they 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 investment volume, but in recent years, the products have increasingly been adapted for retail investors.
It is a centralized market where all transactions take place in a single financial center. In Europe you have EUREX for trading European indices (DAX40, CAC40, Euro Stoxx 50) and in the US you have CME for 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 volume, depth of market (DOM) and order book in their analysis.
Given the large volume traded in futures, the commissions offered are very attractive compared to CFDs.
Today, Eurex and CME offer a more suitable product for individuals with the creation of mini contracts with which it is possible to invest at €1 per point on the DAX40 (€15,000 / contract) while in the past only contracts were €25 per point (€375,000 / contract).
However, this benefit must be qualified. In fact, in micro-contracts, commissions are higher than in CFDs and liquidity is generally lower. If you want to speculate in the short term on the DAX40 or Dow Jones, the two most widely speculated commodities, CFDs will be more attractive from a cost and liquidity perspective.
Those looking for maximum leverage will be better served with futures which can offer up to 100% leverage depending on the broker. Yet we must be careful that margins double at night and on weekends.
Which broker to choose for trading CFDs and futures?
Futures broker offers are relatively poor in France. It is in the US that you have to travel 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 some serious brokers with customer service in French, such as Saxo Banque or FXFlat Bank, who have a complete offering with trader workstations and MT5 platforms.
In CFD, you have a very wide broker offer in France, including more or less serious offers. We particularly appreciate the offer of FXflat Bank, a serious broker, which has existed for 25 years and is controlled by Baffin. With its 0 commission offer, especially on shares, 100% customer service in French with an office in Paris and a deposit guarantee of up to €500,000 per investor, FXFlat Bank seems to be the best offer to us. Today the French market is more complete. You can test their free demo account for 30 days.
Conclusion
After this thorough and thorough review, we cannot decide for one or the other. Both products have advantages and disadvantages. The choice will therefore depend on everyone, your type of investment, your experience and the capital you have invested.
CFDs are suitable for people who want to speculate on small amounts in the short term and who want to diversify their investments across multiple markets. Futures, on the other hand, would be more suitable for long-term investors who have more capital and need access to volume and order books in their strategy.
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