A futures contract is a legally binding agreement between two parties to buy or sell an asset at a set price on a future date. A Contract for Difference (CFD) is a financial derivative that allows traders to speculate on the movement of an underlying asset.
Futures contracts are regulated by the Danish Financial Supervisory Authority (FSA), and CFDs are not currently regulated in Denmark. However, the FSA has proposed new rules to bring CFDs under its jurisdiction. This article will compare and contrast futures contracts and CFDs in Denmark.
Comparing futures contracts and CFDs
Let’s take a look at the comparison of futures and CFDs
Speculate on the movement of underlying assets
Both futures contracts and CFDs can speculate on the movement of underlying assets. For example, a trader could enter into a futures contract to buy 10 barrels of oil at $100 per barrel. If the price of oil increases to $110 per barrel, the trader will make a profit.
Similarly, a trader could enter into a CFD to buy ten shares of ABC Corporation at $10 per share. If the price of ABC stock increases to $11 per share, the trader will make a profit.
Access to leverage
Leverage is a crucial difference between futures contracts and CFDs. When trading futures, traders can access leverage through margin accounts. Margin is the amount of money a trader must put up to enter a position.
For example, if the margin requirement for crude oil futures is 10%, a trader would need to put up $1,000 to buy 10 barrels ($100 per barrel x 10 barrels). The trader would then have $9,000 of borrowing power (leverage), which could be used to enter into other positions.
CFDs do not have margins or leverage requirements, according to Investopedia. Instead, traders can trade with very high levels of leverage.
For example, if the ABC Corporation stock has a price of $10 per share, a trader could enter into a CFD to buy 1,000 shares with a deposit of just $100. It gives the trader exposure to $10,000 worth of stock for a minimal investment.
Cost of trading
When trading futures contracts, traders must pay commissions and fees to their broker. These fees can vary depending on the broker and the exchange where the contract is traded. In addition, traders may be subject to clearing fees and exchange fees.
CFDs also have commissions and fees associated with them. However, these are generally much lower than the fees charged for futures contracts. In addition, CFDs do not have any clearing or exchange fees.
Contract size
Futures contracts have standard sizes set by the exchanges where they are traded. For example, crude oil futures contracts are for 1,000 barrels of oil, meaning that when a trader buys or sells a crude oil contract, they are buying or selling 1,000 barrels of oil.
CFDs do not have standard sizes, meaning traders can trade any amount of the underlying asset they want. For example, if ABC Corporation stock has a price of $10 per share, a trader could enter into a CFD to buy ten or 1,000 shares. The choice is up to the trader.
Expiration date
Futures contracts have an expiration date, which is the date on which the contract expires and must be either bought or sold.
CFDs do not have an expiration date, meaning that traders can hold their position for as long as they want.
Availability
Futures contracts are available for various underlying assets, including commodities, stocks, bonds, and currencies. However, not all futures contracts are available at all times.
CFDs are also available for a wide range of underlying assets. In addition, CFDs are usually available for more assets than futures contracts. For example, a trader could enter into a CFD to buy shares of ABC Corporation even if there is no corresponding futures contract available.
Risk
When trading futures contracts, the risk is limited to the amount of money a trader has in their account. It is because futures contracts are margined, and traders can only lose the money they have put up to margin the trade.
CFDs are not margined, which means traders can lose more money than they have in their accounts. In addition, CFDs are subject to leverage risk. It is the risk that the underlying asset price will move against the trader’s position, and they will be required to make additional payments to keep their position open.
If you are looking to get into futures or CFDs in Denmark; check out Saxo.