When comparing futures to contracts-for-difference (CFDs) there are many similarities, including:
- Both are derivative products
- You can choose to take long or short positions
- You can access a wide variety of financial markets including indices, forex, and commodities.
However, there is one major difference: the structure of the marketplace.
When looking at indices, there are numerous advantages to trading futures over CFDs. While both are popular for trading around the world, CFDs are not available for trading in a number of countries, including the United States. This is mainly due to concerns arising from the lack of regulation of the CFD marketplace and the structure of the market itself.
To illustrate these differences, let’s focus on Micro-DAX® Futures as a popular, internationally traded futures contract.
What are Micro-DAX® Futures?
Micro-DAX® Futures on the Eurex Exchange are smaller equity index futures contracts based on the most popular equity indices in Europe. These innovative products offer the following advantages:
- Cost effective products – Microcontracts with their small contract size and low margin requirements are the ideal trading tool for global investors with smaller portfolios
- Trade both sides of the market with ease – Traders can take both long and short positions in the DAX index without an upward tick rule or short selling restrictions
- Trade almost around the clock – Micro-DAX® traders can participate in the market almost 21 hours a day, 5 days a week in order to react quickly to business news and global events
- Use your capital – Micro-DAX® Futures provide leverage and purchasing power for futures that allow traders to control a larger contract value with a smaller principal
Why trade Micro-DAX® Futures vs. CFDs?
- Regulated marketplace
- Cost efficiency
Micro-DAX® futures are traded on the highly regulated Eurex exchange. This supervision offers traders a safe and fair environment.
There is no central exchange when trading CFDs and brokers are either very weakly regulated or not at all regulated. CFDs are almost exclusively traded OTC or “over-the-counter”. This means that when an investor places a trade, he executes that trade against the broker with whom he opened the account. This can raise questions related to the broker’s actions in the best interests of the client.
Micro-DAX®-Futures are a smaller version of the liquid and popular DAX-Index-Futures. Micro-DAX® futures cost only 1 euro and make the contracts ideal instruments for those who want to participate in the large German stock market with less financial commitment. In addition, these contracts have low margin requirements that are ideal for global investors with smaller portfolios. In addition, when trading futures, upfront commissions and prices are presented by a broker, so there are no hidden fees or surprises.
While CFDs offer some microcontracts, you don’t pay a standard commission rate like you do with futures. CFDs may have hidden costs, premiums, and swaps. Swaps are the interest rate you pay to hold your position overnight. These interest rates are calculated using a formula, but all banks have a different interest rate, so the cost is not up-front and can vary widely.
When you trade Micro-DAX® Futures, you are trading on a central exchange where thousands of traders try to buy and sell at the most aggressive price. With a centralized exchange, everyone can see the same price, bid, offer, and size at the same time.
When trading CFDs, you are trading against a single participant: your broker. You determine the price of the contracts bought and sold. This means you may not get the best price and accurate market data.
When trading in Micro-DAX® Futures, contracts are traded on the electronic system of Eurex in a central limit order book (CLOB), ie all transactions are transparent and follow the underlying market very closely. Everyone is on the same level playing field.
Alternatively, CFDs can be one-sided as the prices for buy and sell contracts are determined by the CFD broker. In addition, many CFD brokers use the futures market as a basis for setting their prices and then adapt them to the broker.
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