Should you trade CFDs or Take out a margin loan

In the early days investors wanting to borrow money to trade had few alternatives, either borrow money from your bank to purchase stocks or call your stockbroker and apply for a margin loan.

In 2003 traders and investors in Australia got one more choice, CFDs. Since their introduction the industry has changed, CFDs being a simple type of margin lending have become the fastest growing derivative product in the country, outstripping the growth experienced in the warrants market in the course of the mid 1990’s.

No longer does a retail investor have to to apply for a bank loan or deal with costly full service stockbrokers. CFDs have revolutionized the financial services industry, retail investors can now open a CFD account on the internet in minutes and be up and trading before the conclusion of the day, executing all of their orders in real-time on line.

Unlike margin lending CFDs are usually traded over the web with the investors portfolio being marked to market in real-time right through the trading day, this is substantially different to the end of day portfolio revaluations utilized by margin lenders. Real time portfolio margining ensures that traders can properly correctly manage risk right through the trading day instead of having to wait for statements to be created at the end of the trading day.

Like stocks bought using a margin loan CFDs also offer the holder the ability to collect a dividend, however in the majority of circumstances franking credits are not passed on to the holder of a Contract for difference unlike that of a margin loan. The main reason franking credits aren't passed on when holding a CFD is because the owner of a CFD holds an over-the-counter derivative contract and never the physical share. Not owning the physical stock when holding a CFD position also means that the purchaser of the CFD isn't entitled to voting rights in the listed company over which the CFD is based. Many CFD traders only hold their positions open for a small time frame and are not interested in voting rights or franking credits but instead are interested in making a profit from the short term price movements of the CFD.

Among the most significant advantages of Contracts for difference is that traders are able to sell them as easily as they can buy them, this means is that going long is just as straightforward as going short enabling traders to profit in falling markets. With conventional margin lending short selling is hard and near impossible.

CFDs are reasonably inexpensive compared to margin lending, typical brokers offering margin lending will charge 0.50% whereas a typical CFD broker will charge 0.10%. One thing to be cautious of are the rates of interest charged by margin lenders and CFD providers. It's important to note that margin lenders will charge interest only on the sum borrowed whereas CFD companies will charge interest on the total notional worth of the position, however, CFD financing charges are typically lower. Financing rates are imperative to think about when evaluating both products, however, this is often less significant for CFD traders that only hold their positions for a short period of time.

Generally Contracts for difference offer traders additional leverage than regular margin loans allowing traders to achieve a superior return on their investment. You must also be aware that higher leverage may also result in a rise in risk, this is normal with geared products. The leverage offered for CFD investing is often as much as 100 times (1% margin) whereas margin lenders will generally only offer roughly 10 times leverage (10% margin) or less. The gearing obtainable will vary between each CFD broker and margin lender. Gearing is usually determined on a stock by stock basis taking into account the market capitalization of the stock and liquidity.

As Contracts for difference are an over-the-counter derivative product it's essential to note that you do not own the underlying share or instrument over which the Contract for difference is based, this also means that you can not transfer your position to a different Contract for difference provider or stock broker, you can only deal with the Contract for difference broker which you opened the position with. If you buy shares on a margin loan the stocks are held in your name which means you can move them without restraint from one stock broker to another.

CFDs suit short to medium term active traders looking to benefit from market movements in both directions, however, margin lending is better suited to people who are seeking long-term investment options and want to benefit from the income tax benefits franking credits provide, as well as voting rights. It is important to remember that both products are geared, you should make certain that you adopt a good money management plan and not utilize the leverage obtainable to its full capacity.

Article Source: http://gamblingarticlessite.com

The writer Craig Bushell is a professional CFD trader. Craig deals with Australia's most popular CFD broker IC Markets. Craig has written a number of books and manuals on CFDs, you can get a hold of his most up to date guide to CFD trading and understand more about Contracts for difference at no cost.

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