The question of many aspiring traders – Which one is better, CFD Trading or Stocks Trading? If you are planning to trade with either of these two, you certainly need to distinguish its good and bad side before you jump to a conclusion on which one to use.
What are the differences if you buy a share from a traditional broker and trade it through a Contract for Difference (CFD)?
Shares trading and CFD trading have very similar characteristics. The only big difference between these two is that CFD traders don’t own the underlying asset while shares trading lets you acquire a company share by paying the entire value of the company share. Contracts for Difference involves a contract between the trader and the broker. More importantly, it involves a margin that allows you to acquire a larger market exposure just for paying a minimum amount, around 5% to 20% in most cases.
Important Points About CFD Trading
CFDs are being traded on margin, meaning an initial deposit is required to obtain an even larger position. Here, you actually loan money from your broker to speculate on an asset, either you buy or sell it.
In Contracts for Difference, the trader doesn’t actually own the underlying asset which exempts the trader from paying the stamp duty. The trader enters a contractual agreement with the broker agreeing that the losing party will pay the difference between the opening price and the closing price.
Contrary to beliefs, Contracts for Difference can also be traded long. Although, most traders consider going short because of the overnight fees that they will have to shoulder when they leave their position open throughout the night.
Contracts for Difference, as of the moment, are exempted from paying the UK Stamp Duty which is 0.5%. However, the profits you acquire will be subjected to capital gains tax according to the law.
Will I be able to get a certificate for trading Shares on CFD?
No certificate will be given to you because you are really not buying a stock of the company. What you are aiming for is to get the price movement from the time you open the CFD position and the time you close it.
Is there a three-day settlement period in CFD like the ones from real shares trading?
In Contracts for Difference, you don’t have a 3-day settlement just like the traditional shares trading. You won’t wait for long because the settlement is automatically done by the time you press the buy or sell button.
Why is it advisable to trade CFD rather than traditional stocks?
There are several reasons to consider here but the number one reason is the presence of leverage and margin. Leverage is pretty good for new traders especially those who cannot afford to cough up huge investments to buy a company share. With CFDs, you can trade just by paying an initial investment capital of 5-10% and trade as much as 20 times the value of your initial investment. As considered by many, leverage is the greatest advantage of CFD trading.