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There are many trading products currently available in the market and it might at times be confusing deciding which one to work with. The type of trading product to use solely depends on an individual’s needs. What do you want to achieve from the trading? Is the trading instrument suitable for you? These are just some of the questions one needs to ask themselves when choosing a trading product.
Two of the most popular products in the market currently are; stocks and Contract For Difference (CFDs). This article compares the two and highlights the good and the bad that come with using them when you are trading.
Efficient use of capital and profits
Buying stocks can be quite expensive as compared to CFDs. While you can reduce the cost used to purchase stocks by using margin loans, you will still be required to have at least 30% of the whole amount in cash. CFDs on the other hand only ask for 3% of the value and can even go lower depending on what you are trading (whether indices or currencies). Also, due to the employed leverage with CFDs, the profit potential is higher, usually 15 to 20 times that of stocks.
Risk management
When it comes to the risk factor, working with stocks wins, hands down. With stocks, the maximum amount you can lose is 100% assuming you hadn’t borrowed the capital. On the other hand, without proper risk management, CFDs can make loses larger than 100% of the amount initially invested. Risks with stocks are much easier to manage than that of CFDs.
How much does it cost to trade?
There are usually two main costs associated with CFDs and stocks. First of all, there is brokerage where the amount spent highly depends on who you open an account with and there are also interest costs. Purchasing CFDs will cost you less than purchasing stocks. However, since CFDs are leveraged, the interests will be charged.
Are the profits taxed?
CFDs were originally developed to avoid the stamp duty in the United Kingdom. The Australia capital tax regimes treats all loses and profits in CFDs as income since the tax regime doesn’t apply. This simply means that there could be some tax advantages to working with stocks. You do however need to note that rules on taxes change as you move from one country to the other and this might make a huge difference. If one is to make a decision on whether to work with stocks or CFDs based on the tax charged, then it would be best if they took their time and weighed the option based on the tax rules in their country or state.
Conclusion
There really isn’t a way to tell which one is better than the other between CFDs and stocks as the whole process solely depends on what you are looking for. Both CFDs and Stocks are suitable for different people from different parts of the world. Just take your time and find out which one works for you the best and go for it.
Two of the most popular products in the market currently are; stocks and Contract For Difference (CFDs). This article compares the two and highlights the good and the bad that come with using them when you are trading.
Efficient use of capital and profits
Buying stocks can be quite expensive as compared to CFDs. While you can reduce the cost used to purchase stocks by using margin loans, you will still be required to have at least 30% of the whole amount in cash. CFDs on the other hand only ask for 3% of the value and can even go lower depending on what you are trading (whether indices or currencies). Also, due to the employed leverage with CFDs, the profit potential is higher, usually 15 to 20 times that of stocks.
Risk management
When it comes to the risk factor, working with stocks wins, hands down. With stocks, the maximum amount you can lose is 100% assuming you hadn’t borrowed the capital. On the other hand, without proper risk management, CFDs can make loses larger than 100% of the amount initially invested. Risks with stocks are much easier to manage than that of CFDs.
How much does it cost to trade?
There are usually two main costs associated with CFDs and stocks. First of all, there is brokerage where the amount spent highly depends on who you open an account with and there are also interest costs. Purchasing CFDs will cost you less than purchasing stocks. However, since CFDs are leveraged, the interests will be charged.
Are the profits taxed?
CFDs were originally developed to avoid the stamp duty in the United Kingdom. The Australia capital tax regimes treats all loses and profits in CFDs as income since the tax regime doesn’t apply. This simply means that there could be some tax advantages to working with stocks. You do however need to note that rules on taxes change as you move from one country to the other and this might make a huge difference. If one is to make a decision on whether to work with stocks or CFDs based on the tax charged, then it would be best if they took their time and weighed the option based on the tax rules in their country or state.
Conclusion
There really isn’t a way to tell which one is better than the other between CFDs and stocks as the whole process solely depends on what you are looking for. Both CFDs and Stocks are suitable for different people from different parts of the world. Just take your time and find out which one works for you the best and go for it.
Lauren Blackman is the author of this article on CFD Trading. Find more information on CFDs here.