There are a few key differences that investors should be aware of regarding futures and CFDs. In general, futures contracts are more standardized than CFDs. They also involve the commitment to buy or sell an underlying asset at a specific price on a specific date in the future. Futures contracts are traded on exchanges, while CFDs are traded over-the-counter (OTC).
The most popular exchange for trading futures in Asia is the Singapore Exchange (SGX). The SGX offers various futures contracts, including those for commodities such as crude oil and gold and financial products like currencies and interest rates. CFDs, on the other hand, are typically not traded on exchanges. Instead, they are traded OTC between two parties. It means that the terms of each CFD contract can be customized to suit the needs of the parties involved; find more info here.
One of the critical advantages of futures contracts is that they are highly regulated. Exchanges like the SGX have strict rules and regulations to ensure fair and transparent trades. It provides a high degree of certainty for investors and helps to reduce counterparty risk.
CFDs, on the other hand, are much less regulated. It can be seen as both an advantage and a disadvantage. On the one hand, it allows for greater flexibility in terms of contract design. On the other hand, it also means more potential for abuse by unscrupulous brokers.
Greater price discovery
Another great advantage of futures contracts is that they provide more excellent price discovery. It is because exchanges like the SGX bring together buyers and sellers from all over the world in a centralized marketplace. It results in a more efficient market, with prices that better reflect the underlying supply and demand. On the other hand, CFDs are typically traded OTC between two parties.
Futures contracts also tend to be more liquid than CFDs. Many buyers and sellers are trading on exchanges like the SGX. It results in tight bid-ask spreads and low transaction costs.
On the other hand, CFDs are typically less liquid than futures contracts. It is because they are traded OTC between two parties, and the terms of each contract can be customized to suit the needs of the parties involved. It often results in wider bid-ask spreads and higher transaction costs.
Futures contracts are also more transparent than CFDs. It is because exchanges like the SGX publish detailed information on all trades. It includes the price, quantity, and time of each trade. On the other hand, CFDs are typically traded OTC between two parties. It means that there is less transparency, as the terms of each contract are customized to suit the needs of the parties involved.
No delivery risk
Another advantage of futures contracts is that there is no delivery risk. It is because the buyer and seller of a futures contract are not required to take delivery of the underlying asset. Instead, they settle their obligations in cash. CFDs, on the other hand, do involve delivery risk. The buyer and seller of a CFD contract are required to take delivery of the underlying asset if they wish to exercise their option to buy or sell.
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Reduced counterparty risk
Futures contracts also tend to have reduced counterparty risk. It is because exchanges like the SGX provide clearing services to all members. The exchange guarantees each trade, and the risk of one party defaulting is reduced. On the other hand, CFDs are typically traded OTC between two parties. There is more counterparty risk as there is no third-party guarantee.
Fixed contract size
Futures contracts also have a fixed contract size. It makes it easy to calculate your potential profits and losses, as you know exactly how much each contract is worth. On the other hand, CFDs do not have a fixed contract size. It means that your potential profits and losses can vary depending on the size of the contract you trade.
Fixed expiration date
Futures contracts also have a fixed expiration date. You know exactly when the contract will expire and can plan your trading accordingly. They do not have a fixed expiration date. It means that you may be required to take delivery of the underlying asset if the price moves against you.