CFD Trading Or Margin Lending – What Are The Key Differences?
Contracts for difference (CFDs) and margin lending are some of the most famous trading opportunities to current investors. The reputation of CFDs is expanding rapidly because of the ease of trading them, and the short-term financial benefits they offer. Margin lending is also an important trading strategy for long-term investors. You probably have heard about CFDs and Margin lending trading but have failed to differentiate between the two strategies. This article will enlighten you on the differences between CFDs and Margin lending trading strategies.
What are CFDs?
You probably wonder what CFDs are. CFDs are tradable instruments that mirror the fluctuations of the assets underlying them. CFDs like any other financial instruments are risky, and they provide opportunities to gain or lose based on the volatility of the asset in the market. As an aspiring investor you need to understand one simple rule that the greater the rate of return from an investment the greater the risk involved. I don’t mean to discourage you in any way, but you need to know the truth. CFDs are partnerships or agreements between investors and brokers.
CFDs are rapidly transforming the financial instruments industry and are one of the fastest growing financial products in the world. CFDs are available in selected countries such as the United States, and many parts of Europe. The main benefit of CFDs is that the investors don’t require the services of a middleman to purchase them. Therefore, the investors don’t incur extra costs when buying the financial instruments.
It is easy for private investors to open a CFDs account with companies that accommodate private investors such as CMC markets. The investors can start to profit immediately after opening and funding a CFDs account. Sounds easy, yes, you can make much money within minutes or hours if you know what you are doing.
What is margin lending?
Have you ever heard about margin lending? Margin lending is a program in which the lending institutions or companies allow individuals to borrow money for investment purposes. Margin lending is a very useful way for the investors to grow their wealth at an incredibly fast rate. Margin lending allows the investor to enjoy tax benefits and increased security by diversifying the investment portfolios.
An investor who wishes to make money quickly when trading CFDs can have special agreements with the company to offer both CFDs and margin lending in the contract. When using margin lending to trade CFDs, you are solely responsible for the investment decisions you make.
For the experienced traders, CFDs offer a better opportunity for short-term investments. On the other hand, margin lending is very helpful for the traders that are interested in long-term investment.
As you have seen CFDs have greater returns within a short time. Therefore, if you are the investor who wishes to grow rich quickly, then the CFDs are good for you. All you need is a good money management strategy so that you don’t drain your account. Remember what works for you can work against you.
What are the differences between margin lending and CFD trading?
There are several main differences between CFDs trading and margin lending. The process of trading CFDs’ is done online, and the individual investors have their portfolios updated throughout the day. In the case of margin lending, the report is provided at the end of the trading day. CFDs’ trading give the investors a chance to control their investments, and the investor receives a warning when they lose value to dangerous levels. Therefore, the investor is given an opportunity to handle risk in CFDs trading.
In CFDs trading, the traders are entitled to receive a dividend while the margin lenders get franking credits because margin lending involves the ownership of actual shares as opposed to CFDs trading. CFDs traders are usually interested in short-term gains of the portfolios while margin lending is for the investors with long-term aspirations on the portfolios.
The other difference between CFDs trading and margin lending is that selling in the case of CFDs is much easier than selling in margin lending. The financing of CFDs trading is cheaper than the case of margin lending despite the fact that CFDs have higher interest charges than margin lending.
The leverage associated with CFDs trading is bigger than the one involved in margin lending. Therefore, it is possible to get more returns with minimal amount. The risk involved in CFDs trading is also higher than the one involved in margin lending. Therefore, an effective risk management strategy is needed when trading CFDs.
In the case of CFDs trading, the investor does not have the ownership of the investment, and the position is not transferrable to a different service provider. In the case of margin lending, the investor has the ownership of the underlying stock, and he/she can shift between brokers without any limitation.
In conclusion, both CFDs’ and margin trading have their advantages and disadvantages. The point to note is that CFDs’ trading offers a better opportunity for the short-term investors, while margin lending is suitable for the long-term investors. CFDs’ trading has significant amount of risk, and a good risk management strategy is needed.