CFD Trading Vs Share Trading
There are so many advantages of CFDs over Shares I thought we should run through a few of them in depth. In many cases a lot of active traders will even prefer to trade a CFD will little to no leverage over a share because of the benefits CFDs offer.
CFDs are settled instantaneously. This means the second you buy or sell a CFD the exchange of position and funds is done in a fraction of a second. Share traders will wait up to 3 to 4 days for standard settlement periods. Benefits such as this really benefit active traders and especially ones with very little capital. Take for example a share trader coming to the markets with $5000 and a CFD trader the same. If the share trader uses the whole $5000 to take a position and then decides to sell the next day to enter another position then the shares trader may be waiting 3 days to get the funds cleared before they may enter that position, in a lot of instances missing the ‘boat’. A CFD trader would be able to place that second trade a second after closes out the previous trade.
As we have touched on numerous times in this blog CFDs carrier a large amount of leverage for those with very little capital to gain much greater exposure to the markets. Not only can you gain far greater exposure but also diversify your portfolio to mitigate risk.
Not many, if any, equity broker give clients the ability to short sell. All CFD providers do. This means that there are double the opportunities to profit when trading CFDs over Equities. We all know stocks go both up and down so by trying to select on winner can be difficult especially during time of economic downturn. CFDs make profiting much easier.
Cost of Trading
To kick us off here all we have to do is start with GST. CFDs do not incur GST like share trading so there is an automatic 10% saving for a CFD trader. On top of this industry standard minimums for shares are usually double at minimum some of them 10 times greater. Also CFD providers offer huge discounts to really active traders saving you huge amounts on commission and therefore increasing net profits.
A lot of us have been in a situation where we hold an equity positions that is performing as we expected and profiting quite nicely. Along comes another trade opportunity we want to get into but do not have the capital and really don’t want to sell part or all of our performing equity trade and once we have sold part or all of this position wait 3 days for the funds to clear. A huge benefit of CFDs is that they allow you to use unrealised profits as margin to open additional positions or build on already existing one. Be very careful when doing this as when the market turns against you your free equity can dissipate quicker than expected.
Trading Equity CFDs, especially with a DMA provider, is basically exactly the same as equity trading just with the above mentioned benefits. A DMA CFD provider with give you direct access to the same exchange you would be on if you were share trading with the same market prices and liquidity. Order types are the same, market auctions are the same and trading hours identical. The only thing a CFD trader has to do is manage risk a lot better. Otherwise look at the list of benefits, CFDs speak for themselves.
Advantages such as these are just a few reasons why traders will even pay financing on a CFD with little to no leverage to get the full advantages of CFDs especially for active traders. Below is a clip demonstrating this. Very similar to the CFD example we gave earlier in the blog.