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A futures contract (or simply ‘futures’) and a contract for difference are both derivative products. When you purchase a CFD, you are buying a set number of contacts on a market if you are expecting that market to appreciate and selling a set number if you expect the market to fall. The change in the value of the position you take is reflected in the movements of the underlying market. With CFD trading, you can close your position at any time when the market is open.
Futures, on the other hand, are contracts that mean you are agreeing to buy a financial instrument at a set point in the future at a predetermined price. Unlike CFD trading, you have a set date and price for this transaction, which means closing your position could be costly. The value of a futures contract depends on both the current movements in the underlying market and the market sentiment about the future price of an asset.
CFD trading allows you to profit from both a rising or falling market. You can make money on an appreciating or depreciating asset because the contract offers both buy and sell options.
This means you can use CFDs to mimic investing in an asset by opening a long (buy) position; this is known as buying or ‘going long’. Conversely, you can open a short (sell) position if you think the price will decrease, which is essentially ‘betting’ against the market. This is also known as selling or ‘going short’.
When CFD trading, you can open positions on a variety of different asset classes including shares, indices, currencies, commodities and cryptocurrencies – all within one single platform.
A trader can enter the stock market without having to deal directly with share purchases, providing greater liquidity and easier execution. This has the added benefit of being able to profit in a falling market by short selling.
Trading CFDs is one of the very few ways to gain access to the indices market. CFDs on indices mirror the composition of a certain index. The FX market is suited to CFDs and leveraged trading due to the relatively small price movements that occur in these markets.
Remember to employ risk management techniques when trading at all times and be even more cautious of assets that have a history of being highly volatile like cryptocurrencies.
How to trade CFDs