Trading CFDs Vs Share Dealing

Posted by kecipe on January 24th, 2020

As a trader, your choices of participating in trading instruments on the stock market is dependent on the funds your can spare towards this activity. If you have enough cash to invest, then you can do conventional share trading in the cash or physical market. However, if you are constrained for cash or wish to stretch your dollar to the maximum, then you can trade CFDs or contracts for difference as they are known. You may also look at futures. The last two trading instruments differ from cash dealing in the kind of leverage they allow traders to benefit from and are therefore more speculative in nature than conventional share dealing.

As mentioned, the advantage of CFD trading lies in the manner you can use your capital to make significant profits. However, you must remember that you may be able to trade only some of the stocks in the overall basket of stocks traded on the exchange. You may not be able to trade certain low cap stocks. Conventional share trading on the other hand allows you to trade any stock.

On the dividend front, when you trade CFDs you continue to get dividends except that you would not get franking credits or imputation credits. That is because to get these credits, you are expected to hold on to your shares or position for at least 45 days and that may not be possible with CFD trading. Hence there is some advantage when you share trade as far as dividends are concerned.

On the short selling front, CFD trading has an obvious advantage over share trading. The margins are much lower and the restrictions are fewer. In normal share trading, the broker would have to find a counter party and the costs of trading would also be high. CFD traders also have the opportunity to hedge positions by trading in the physical market.

When you trade CFDs, you can also place guaranteed stops which may not always be possible when you trade in the physical market.

The advantages of CFDs over share trading can thus be summed up as under:
* Lower costs involved
* Possibility of overnight financing for your CFD positions less than 90 days
* The leveraging benefit
* Short selling is not a problem
* Possible to get dividends
* You can place guaranteed stops

Overall it does appear that CFD trading scores over share trading due to the above benefits.