What Makes Online Share Trading Just As Good As Cfd Trading
Its not tough to uncover websites and forums where people chat about the benefits of CFDs over equities however have you ever questioned whether or not the folks really writing these reviews are investors who have knowledge in both financial instruments or are they just paid writers out to promote CFDs. In this brief appraisal I am going to touch on the differences between both CFDs and shares and highlight the unique features of both instruments that has permitted traders and investors to exploit the power of their investment portfolio from the comfort of their very own lounge room.
CFDs and stocks are vastly different not only in the method they work but also in how they're traded. One of the essential contrasts is the fact that CFDs are an over the counter or OTC product which means your transactions are not conducted on an exchange but rather with the CFD provider that youre dealing with. Shares on the other hand are dealt on an exchange meaning that you are buying and selling off other people in the market with your equity broker simply acting like a conduit providing you with a gateway to the market.
So now that you know one of the primary fundamental distinctions between CFDs and stocks lets get into some of the key mechanical differences in detail.
Settlement
One of the most obvious variations between both products is how they're settled. Whenever you buy stocks on the stock exchange you dont need to pay for the share for three days, conversely if you sell stocks you dont be given any funds for three days. The transaction day plus 3 days or T+3 relates to the settlement period set by the clearing house not the broker. Of course whilst dealing in CFDs there isn't a clearing house involved because trade is OTC, this means your CFD provider basically sets the rules, as CFD brokers typically do not like to wear the chance of having the settlement of a transaction fail they are going to ask for the money upfront, this concept of same day settlement is called T+1. Its worth noting that some online stock brokers also apply T+1 settlement to reduce the chance of settlement failure.
There really isn't a genuine benefit of T+1 or T+3 settlement as in the end the net outcome is the same, though a large amount of active traders choose same day settlement for the simple reason that it makes their cash flow simplier and easier to deal with.
Leverage
Undeniably the most important and obvious distinction between CFDs and Shares is the concept of leverage. By the very nature of the instrument CFDs are geared meaning that for a relatively small outlay it is possible to achieve a very large exposure to a share. Usually the gearing level on a large amount of CFDs is in the order of ten percent which means with a margin of $1,000 you are able to potentially gain $10,000 exposure to the price movement of a share. If you were to purchase $10,000 worth of shares you would have to spend the total sum, rather than the $1,000 required to open your CFD trade, providing a more efficient use of capital and return on your original capital outlay.
It is important to understand that though gearing can work in your favor, it can also work against you, this means that your gains and your losses are bigger however it's also possible to possibly loose in excess of your trading account balance. With equity trading on the other hand you cannot lose more than the quantity paid, however you profit potential can also be reduced.
Short Selling
Equally CFDs and shares can easily be short sold even though the process is often less complicated with CFDs for the simple reason that short sell dealings can be completed on-line instead of over the telephone. The key reason why short selling equities directly isn't an easy process is due to short sale reporting requirements which need to be disclosed via tagging short deals executed on the exchange. Although CFD brokers also have short sale disclosure requirements to meet they aren't required to tag short trades for the simple reason that they often pre borrowed stock to cover any short sales, in actual fact this means that they have covered their clients short positions before the customer even places the trade.
Trading Costs
A common myth in the market is that CFDs are more affordable to buy and sell than shares, however this is not always the case. Financing plays a necessary part in CFD trading however nearly all investors time and again ignore this. Without conducting any mathematical calculations as a rule of thumb an AUD one hundred thousand dollar trade will cost you something like twenty five dollars each night in financing fees, on this basis should you hold a position for around five days this is the equivalent of having to pay one hundred twenty five dollars in brokerage or 12.5 basis points. Obviously if you dont have the funds it might be worth paying this however if the leverage of the CFD is high you need to think twice as CFD financing is not calculated on the borrowed amount but rather on the full theoretical value of the trade as such it could be more economical to pay for your trade outright and pay a higher upfront commission charge.
CFDs can naturally be a cost effective dealing tool but this is only when trades are held open for a very short time period though, stock positions on the other hand can be held open for as long as you like with only the first transaction fee payable, this is a vital difference to keep in mind.
Despite needing to pay financing costs one of the advanatages of CFDs is that you are not required to pay any GST on your commission, although a very small amount its worth taking into account the impact of GST on your dealing costs if youre an active trader.
Unrealized Profits
Since CFDs are marked to market on a daily basis your earnings or losses are also debited or credited out of your account day after day this is quite different to buying and selling stocks where gains or losses are only realized at the time of sale. In this regard one of the benefits of CFDs is that you can make the most of your unrealized earnings without needing to close your positions, naturally there is also a draw back to this in that your losses are recognised on a daily basis which means that unlike share investing the free equity within your trading account may decline without you closing positions.
Only five differences have been touched upon in this informative article, in later articles we will cover some of the other dissimilarities between shares and CFDs. In the meantime if you want to discover more exciting information about stock and CFD trading it is possible to download a free
CFDs and stocks are vastly different not only in the method they work but also in how they're traded. One of the essential contrasts is the fact that CFDs are an over the counter or OTC product which means your transactions are not conducted on an exchange but rather with the CFD provider that youre dealing with. Shares on the other hand are dealt on an exchange meaning that you are buying and selling off other people in the market with your equity broker simply acting like a conduit providing you with a gateway to the market.
So now that you know one of the primary fundamental distinctions between CFDs and stocks lets get into some of the key mechanical differences in detail.
Settlement
One of the most obvious variations between both products is how they're settled. Whenever you buy stocks on the stock exchange you dont need to pay for the share for three days, conversely if you sell stocks you dont be given any funds for three days. The transaction day plus 3 days or T+3 relates to the settlement period set by the clearing house not the broker. Of course whilst dealing in CFDs there isn't a clearing house involved because trade is OTC, this means your CFD provider basically sets the rules, as CFD brokers typically do not like to wear the chance of having the settlement of a transaction fail they are going to ask for the money upfront, this concept of same day settlement is called T+1. Its worth noting that some online stock brokers also apply T+1 settlement to reduce the chance of settlement failure.
There really isn't a genuine benefit of T+1 or T+3 settlement as in the end the net outcome is the same, though a large amount of active traders choose same day settlement for the simple reason that it makes their cash flow simplier and easier to deal with.
Leverage
Undeniably the most important and obvious distinction between CFDs and Shares is the concept of leverage. By the very nature of the instrument CFDs are geared meaning that for a relatively small outlay it is possible to achieve a very large exposure to a share. Usually the gearing level on a large amount of CFDs is in the order of ten percent which means with a margin of $1,000 you are able to potentially gain $10,000 exposure to the price movement of a share. If you were to purchase $10,000 worth of shares you would have to spend the total sum, rather than the $1,000 required to open your CFD trade, providing a more efficient use of capital and return on your original capital outlay.
It is important to understand that though gearing can work in your favor, it can also work against you, this means that your gains and your losses are bigger however it's also possible to possibly loose in excess of your trading account balance. With equity trading on the other hand you cannot lose more than the quantity paid, however you profit potential can also be reduced.
Short Selling
Equally CFDs and shares can easily be short sold even though the process is often less complicated with CFDs for the simple reason that short sell dealings can be completed on-line instead of over the telephone. The key reason why short selling equities directly isn't an easy process is due to short sale reporting requirements which need to be disclosed via tagging short deals executed on the exchange. Although CFD brokers also have short sale disclosure requirements to meet they aren't required to tag short trades for the simple reason that they often pre borrowed stock to cover any short sales, in actual fact this means that they have covered their clients short positions before the customer even places the trade.
Trading Costs
A common myth in the market is that CFDs are more affordable to buy and sell than shares, however this is not always the case. Financing plays a necessary part in CFD trading however nearly all investors time and again ignore this. Without conducting any mathematical calculations as a rule of thumb an AUD one hundred thousand dollar trade will cost you something like twenty five dollars each night in financing fees, on this basis should you hold a position for around five days this is the equivalent of having to pay one hundred twenty five dollars in brokerage or 12.5 basis points. Obviously if you dont have the funds it might be worth paying this however if the leverage of the CFD is high you need to think twice as CFD financing is not calculated on the borrowed amount but rather on the full theoretical value of the trade as such it could be more economical to pay for your trade outright and pay a higher upfront commission charge.
CFDs can naturally be a cost effective dealing tool but this is only when trades are held open for a very short time period though, stock positions on the other hand can be held open for as long as you like with only the first transaction fee payable, this is a vital difference to keep in mind.
Despite needing to pay financing costs one of the advanatages of CFDs is that you are not required to pay any GST on your commission, although a very small amount its worth taking into account the impact of GST on your dealing costs if youre an active trader.
Unrealized Profits
Since CFDs are marked to market on a daily basis your earnings or losses are also debited or credited out of your account day after day this is quite different to buying and selling stocks where gains or losses are only realized at the time of sale. In this regard one of the benefits of CFDs is that you can make the most of your unrealized earnings without needing to close your positions, naturally there is also a draw back to this in that your losses are recognised on a daily basis which means that unlike share investing the free equity within your trading account may decline without you closing positions.
Only five differences have been touched upon in this informative article, in later articles we will cover some of the other dissimilarities between shares and CFDs. In the meantime if you want to discover more exciting information about stock and CFD trading it is possible to download a free
