Singapore is a bustling financial hub known for its diverse economy and thriving trade market. When it comes to trading, there are various options available to investors and traders in Singapore. Two popular types of trading are CFD (Contract for Difference) and futures trading.
CFD and futures trading involves wagering on the price movements of underlying assets without actually owning them. However, some critical differences can significantly impact a trader’s strategy and outcomes. This article will discuss the significant differences between CFD and futures trading in Singapore.
One of the main differences between CFD and futures trading is the contract specifications. With CFDs, traders contract with a broker, agreeing to exchange an asset’s price difference between the contract’s opening and closing. The contract size for CFDs is flexible and can be customised according to the trader’s preference.
On the other hand, futures contracts have standardised specifications set by exchanges, including contract size, expiry date, and tick size. Therefore, all traders who trade the same futures contract will have identical terms. Standardising futures contracts allows for more liquidity and transparent pricing, making it a popular choice among institutional investors.
Traders also have the option to trade mini or micro contracts in futures, making it accessible for smaller retail traders. However, with CFDs, the contract size can be as small as one share, making it more suitable for individual traders.
Margin requirement is another significant difference between CFD and futures trading. In CFD trading, traders must deposit a percentage of the contract value, known as the margin, to open a position. It allows traders to leverage their positions and earn higher profits with smaller upfront capital. However, it also means a higher risk as losses can exceed the initial margin.
In futures trading, margin requirements are set by exchanges and are typically lower than CFDs due to the standardised contract size. Most futures exchanges require traders to deposit initial and maintenance margins, which must be maintained throughout the trade. It ensures traders have sufficient funds to cover losses if their positions go against them.
Notably, margin requirements can change depending on market volatility and the underlying asset’s risk. CFD brokers may also have different margin requirements, making it crucial for traders to understand their broker’s margin policies.
The trading hours for CFDs and futures also differ significantly. CFDs are available for trading 24 hours a day, five days a week, as there is no central exchange for CFDs. It allows traders to take advantage of price movements even after traditional market hours. However, trading outside regular market hours can also come with higher spreads and lower liquidity.
Futures contracts have specific trading hours set by exchanges during the day, typically overlapping with traditional market hours. It ensures higher liquidity and tighter spreads during active trading hours. However, it also means traders cannot take advantage of price movements outside the set trading hours.
Traders must consider their trading style and preferred markets when choosing between CFDs and futures, as the trading hours can significantly impact their strategy and potential profits.
Cost of trading
The cost of trading is another critical difference between CFD and futures trading. With CFDs, traders pay the spread, the difference between an asset’s buying and selling price and commission fees to their broker. The spread can vary depending on market conditions and broker policies.
Futures trading has a different fee structure, where traders pay a commission fee per contract traded instead of a spread. Therefore, traders with higher volumes will likely pay lower commissions than CFDs. However, it also means traders must factor in their commission fees when calculating profits and losses.
Traders must also consider other costs, such as overnight financing fees and exchange fees when deciding between CFDs and futures trading.
Another significant difference between CFD and futures trading is the settlement process. In CFDs, traders do not physically own the underlying asset; therefore, no physical delivery or settlement occurs. Instead, the contract is settled in cash, where the difference between the opening and closing price is paid to or from the trader’s account. It allows for faster transactions and eliminates the need for physical deliveries.
On the other hand, futures contracts require a physical delivery of the underlying asset upon contract expiry. However, most futures traders close their positions before expiry and settle in cash based on market prices at the closure time. It ensures efficient trading and minimises the risk of physical delivery.
Traders must understand the settlement process of their chosen instrument to manage their positions effectively and avoid potential complications. It is also essential to note that futures contracts have a fixed expiry date, while CFDs can be held indefinitely.