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CFD Trading Or Margin Lending - What Are The Key Differences?
by: crichton66c on
Date: Mon, 8 Nov 2010 Time: 11:43 PM
CFD trading has in many ways changed the face of the financial instruments industry. CFDs are one of the fastest growing financial products in the countries where are they not banned. The growth in CFDs is rapid, given that they don't require a retail investor to apply for a loan or they don't deal with expensive middlemen to facilitate trading. Users can open a CFD account in a matter of minutes, start trading, and clock profits in their account before the day is done. Margin lending, on the other hand, has its own share of benefits, and a portfolio can comprise one or both depending on investor's objectives.
1. CFD trading is usually done on the internet. The trader's portfolio is marketed all day as against "end of the day portfolio revaluations" that happen in case of margin lending. This reduces risk as the investor has a better ability to manage risk on account of increased visibility as well as more time to react.
2. CFD traders receive a dividend but not "franking credits" which the margin lenders get. This is because, in CFD trading, you don't really own the share, whereas in case of margin lending you do. This may not be a real drawback as CFD holders are usually looking at short-term gains rather than long-term holdings.
3. The third big difference is in the ease of sale and the related flexibility. Selling CFDs is much simpler than short selling, which is near impossible in case of margin lending.
4. CFD trading financing works out a lot cheaper than margin lending, with brokers charging 0.1 percent for the former as compared to 0.5 percent for the latter. This is despite the fact that interest charges on CFDs work out to be higher than that of margin lending.
5. Providers of contracts for difference also offer more leverage than margin lenders. This means that you can get a lot more return on a lesser amount. It can vary like a 100 times for CFDs vs. 10 times or less for margin lending. This also means that you have higher risk and should probably consider having some kind of risk management strategy.
6. Another point of difference is that in CFD trading you don't really own the underlying stock. Therefore, you cannot transfer your position to a different service provider for any reason whatsoever. On the other hand, in margin lending you can move freely between one stock broker and the next depending on your will and convenience.
In summary, both CFD trading and margin trading have their advantages and disadvantages. But, CFD trading appears to be better suited to short-term traders looking to take advantage of market movement in either of the two directions. On the other hand, margin lending seems to be more relevant for the people looking for a long-term investment opportunity. It is also for those who want the additional tax benefit that franking credits provides. Both instruments have their place. You should discuss your investment portfolio with an expert before ruling out either. A combination of the two may work out the best.
About the Author
Discover more about CFD trading and the financial markets with access to a comprehensive education program. Also available is an extensive range of online seminars including Introduction to CFDs. Start your CFD journey today.
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