Most products forex trading These are all trading products under CFD contracts. However, for some commodity products, the floor can use one of two types of contracts including: spot price and futures price to provide to traders. This leads to a price difference when futures contracts expire. For foreign traders this is very normal, because most of the traded goods are products at futures prices instead of spot prices. However, they may be strange to many Vietnamese traders, especially when the futures and spot prices have a "phase difference" at the time of maturity. So what are futures contracts, how are they different from contracts for differences?
What is a futures contract?
A futures contract is a small branch of a forward contract, an agreement between the two parties on the purchase / sale of underlying assets "pegged" to a uniform price in advance for a certain time in the future. .
This means that the futures contract must have an expiry date, or maturity, for the property to be delivered at the original agreed price. Buyers of future contracts must fulfill the obligation to buy and receive underlying assets when the futures contracts expire. The seller of the futures contract must fulfill the obligation to provide and deliver the underlying asset on the expiry date.
Futures contracts are used to prevent volatility in underlying asset prices, helping to prevent losses due to price changes.
It is because the parties are required to trade the property on a predetermined price at the future, or the buyer must buy or the seller must sell the underlying asset at a set price, regardless of variable prices such as how about the expiration date. So there will be 3 cases when trading futures contracts:
- Future prices are higher than spot prices, or actual prices. At this time, there will be 1 thing called the deferred purchase price (Contango).
- Future prices will be lower than the spot or actual prices. At this time, there will be one thing called backwardation.
- Future prices converge or equal to real prices.
The reason for postponing buying price and delaying selling price is because no one can predict exactly what the future price will be like. Typically in recent times, due to the impact of the pandemic pneumonia, oil prices have dropped to a record 17 USD / barrel, something no one would have expected. Thus, if the price in the futures contract is determined to be 26 USD / barrel, meaning that the "buying" unit will suffer a loss of 9 USD / barrel.
Now, to delay the purchase price, many companies will combine the spot price and the future price together to prevent risks, meaning they can buy 50% more cases at $ 17, which means It is possible to reduce the loss from USD 9 to USD 4.5, wait to sell when prices are higher to avoid risks or bring big profits. This action is to lock in profits by buying real oil and selling oil forward contracts on the futures market.
What is CFD (arbitrage contract)?
CFD or Contract For Difference is a familiar concept commonly used in forex investment. This is an agreement between the purchase price and the selling price based on the exchange rate of an asset. As the name implies, investors rely on price differences to make a profit, not own them.
The nature of futures and CFDs is both derivative, because their value comes from different underlying assets. Instead of owning products such as stocks, indices, bonds, currency pairs, commodities, futures traders and CFDs, it will be based on analysis to predict price movements in order to profit. .
Currently both CFDs and futures attract a lot of participants, as they are both highly leveraged financial products. So traders only need to spend a small amount of money but it is still possible to trade in large volumes and earn a really attractive profit.
What are the differences between futures and contracts?
Futures
A futures contract is an agreement to buy or sell a financial instrument (underlying asset) with an agreed price on a predefined future date.
Futures contracts are standardized contracts that specify the exact quantity, quality and location of a physical asset, as well as the delivery time. Upon expiry, contracts may be settled in cash, when money is debited or credited to the parties' accounts, or by physical delivery, when the parties are required to make physical investments. International.
Contracts for CFD spread
Contract for differences is an agreement to exchange differences in the value of assets from the beginning of the contract to the end of the contract. Traders try to predict price movements in the most accurate way.
If the trader foresaw that the price will rise, they will probably place a Buy order. Meanwhile, if he believes the asset value will go down, he will place a Sell order. And from the time of opening a position to closing a position, the price will change, this gap can be a loss or a profit, depending on the technical analysis or trading strategy of each person.
Place of transaction
Futures contracts are traded in official markets, such as CME Group, NASDAQ Futures Exchange (NFX), Euronext, derivatives markets securities trading at New Zealann ... This makes futures trading instruments more standardized and more rigorous.
Meanwhile, contracts for differences are usually traded over the counter (OTC), not provided by the official exchange, but through 1 broker somehow.
Spread (difference fee)
A spread is a charge that is the difference between the buy and sell prices of an asset.
Both futures and CFDs are traded on levels spread different. In particular, the spread of futures contracts will be lower and more attractive than CFDs.
Contract scale
Futures contracts are traded on major exchanges and are designed for use by major institutional investors. That is why futures contracts often provide a much larger transaction size than CFDs. For example, you can easily trading 5 ounces of gold valued at only USD 7,250 via CFD. But with a Comex gold futures contract you must trade at least 100 ounces, or about 145,000 USD. Therefore, trading CFDs will be more flexible for smaller traders than futures contracts.
Lever
Lever It is a great catalyst that helps you trade a large volume with just a small amount.
Leverage on futures contracts is not fixed, can vary from contract to contract, but in general, it is not very flexible. The initial deposit (the minimum deposit required to buy a futures contract) is determined for each individual type through compensation or exchange, approximately 5-10% of the value of the futures contract.
Contrary to the futures contracts, CFDs will be provided by a broker so they have the right to set the initial margin value, so traders can choose the leverage option according to the level of the forex floor.
Expiration date
This is the most important difference between a CFD and a futures contract.
Futures contracts always specify an expiration date, and CFDs don't.
Because the underlying asset must be delivered at a previously agreed price, there is a term of termination, for maturity and for a new contract or new term.
In contrast, contracts for difference have no fixed price or future expiry date. You liquidate the contract when the price of the underlying asset is contrary to what you expected.
It is for this reason that with futures the trader will NOT be SWAP wasted when trading overnight. This fee is collected ONLY ONE TIME at the time of contract expiry, called Rollover fee.
Meanwhile, with the CFD will suffer swap fee if you leave the order overnight and are charged 3 times on the 4th to the 5th night, but in return, the contract will never be extended or expired.
How to distinguish the floor offers futures and spot contracts
All foreign exchange money products, floor forex Any form of spot contract is also provided. However, with basic commodity products such as oil, soybean, corn ... will be divided into 2 types of contracts as we said above.
To know which type of contract you are trading with these products, you only need to look at the overnight fee, if the purchased and sold products are not charged overnight (only for goods, please). , that platform is providing products in the form of futures. For floors that are deducted or added overnight, it is a spot price, which does not have a contract expiry date but an overnight fee is something you need to consider when trading, because This is indeed a small number at all!
See more : Top reputable forex floor
What is Rollover fee?
So the biggest difference between futures and CFDs is in the Swaps. With CFD swaps the buy / sell order will be added or deducted directly to the account every day, with future contracts only charged once per night at the time of the maturity extension. contract or Rollover.
The fee will be added or deducted directly to the account 1 time on the due date. The following days, you are still entitled to free overnight and only be deducted until the next maturity.
This shows that if you choose to trade under futures contracts, you will be free for overnight transactions, just close the order before the contract expiry date, it is fully entitled to good fees, without losing fees. night as other CFD fee product exchanges.
See the date of the futures contract in where?
You can go to Investing and watch the due date live by visiting the homepage here. Then, you find the market list, click on "goods" will display a table, you can choose the product you want to see. Here we use the example "oil" for example, click on the oil if you want to see the price and date of the future contract will take place:
You scroll down to find the word "contract".
Click on it, you will see the futures price list and time period. It should be noted, no one knows in advance whether the future price is really like that, so you should not follow this price to trade you!
Or with decks like XTB, you can go directly to the home page, select the category "product information." Then scroll down to find the Rollover table:
As you can see, XTB provides a full contractual maturity date for each product, and not all products are the same. So you can base on the table below to choose the right product, method, transaction time, will save a lot of overnight fees, to increase profits for yourself.
As mentioned above, the main difference between futures and CFDs lies in the swap. With CFDs, interest is calculated on a daily basis, with futures, fees are charged to the underlying asset and only one more time at the time of contract transfer, or until the maturity date. Therefore, you only need to preview the calendar at XTB or Investing and close the order before Rollover takes place.
Hopefully through this article you understand the difference between futures and spot contracts. Good luck!
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Author: Tin Nguyen
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