CFDs vs Margin Loans

cfd-marginIf you were looking for money that you wanted to borrow in order to use in an investment, there weren’t a lot of options for you out there in the past. Buying those shares would require either a margin loan taken through the stockbroker, or a typical bank loan. The CFD is the option that appeared much later, but luckily it is now available to every investor or trader that wants to use it. This is a simpler way of doing a margin loan, so it has grown very quickly in time and it’s actually the derivative product that has among the highest growths (if not the highest). It’s even better than the kind of growth that the market of warrants saw during the 90’s.

These days, there is no need for an investor to go to a broker that is typically expensive or to get a loan from a bank. Thanks to the CFD and the way it managed to change the industry of financial services, everyone can use the Internet to get their own CFD account and starting to trade before the day is even over. The orders placed by these investors are executed in real time this way.

The advantage of the CFD over the margin lending is that the trading is done online and the portfolio is used as the day progresses, while margin lending requires revaluations of the portfolio when the day is over. Since this all takes place during the day, the margining of the portfolio is done real time and there is the actual possibility of managing risk as you’re trading, without waiting for the generation of statements when the day is done.

Both the margin loans and the CFDs give the user the option to get dividends, but the franking credit is not passed when the CFD is concerned (while the margin loan gets it). That happens because a CFD owner has the derivative contract, but he doesn’t own the actual share himself. The lack of the share in the hands of the CFD holder means that he doesn’t get to vote in that company either, so he doesn’t have a say. That’s usually not needed though, as the holder of the CFD will trade with it in the short term and will not need any kind of franking credits or voting rights. They will use the CFD instead to get a quick profit based on the changes of price occurring in the short term.

Another huge advantage of a CFD is the fact that a trader is capable of selling it quickly and easily, just like they did when they bought it. You don’t have a problem going short or long with them, so you can take advantage of a falling market if that’s what you’re after. The short selling of regular shares obtained through margin lending is almost impossible.

You will also find that a CFDs price is typically cheaper than a margin loan would be, at least from the point of view of the commission. The broker that gives you a margin loan will usually require at a 0.50% commission. On the other hand, a provider of CFDs will only ask for 0.10%. Something you need to consider with both of them is the amount they charge for the interest rate. There is a difference here as well though. A margin lender will want for interested to be paid on the amount you borrow. The provider of the CFD will require for interest payments on the open position’s full value. The rates for financing CFDs are usually lower. If you use the CFD for short selling, the rates are not as important and this is truly the area where they shine.

A typical CFD will give a trader extra leverage when you compare it with a typical margin loan, so you get an improved return on the investment you make. The extra leverage might mean an extra amount of risk as well though, something to consider while you make your decision. The leverage given through margin loans is usually at 10%, while CFDs will have even 1% (100 times leverage). Sometimes the leverage will vary depending on the stock involved and different providers will give you other numbers, so it’s nothing set in stone.

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