Without any doubt, stocks are one of the oldest types of investment. Although stocks still retain their popularity, CFDs have recently brought online trading to a whole new level. Can CFDs turn out to be a better substitute for stocks? In this article, we will compare stocks and CFDs to help you see the bigger picture.
What is a Stock?
Basically, a stock is a security that represents a certain degree of ownership in the company. The owner of the shares has a claim on assets and earnings of the corporation. Stocks can bring profits in the form of dividends, though price speculation is also practiced.
What is a CFD?
CFD is a contract to exchange the difference in the value of the particular financial instrument between the actual time the contract is opened and the time it is closed. Unlike traditional stocks, CFD is a derivative and this means that the underlying asset is never owned.
As you might have noticed, stocks and CFDs are quite different. Therefore, we would like to make all the aspects of these financial instruments clear for you.
Firstly, CFDs are more flexible to trade than stocks. To be more specific, CFDs allow going both long and short. CFDs are derivatives designed purely for the short-term speculation on the price of the asset. In turn, conventional stocks trading enables to benefit from rising prices only.
Secondly, stocks trading has much higher costs than CFDs. This is because CFDs are leveraged products, which means that with the relatively small investment it is possible to finance the position of much higher value. Though leverage lowers the costs, it exposes you to a substantial degree of risk. On the contrary, if you want to directly purchase shares of ABC corporation worth $5000, you will be required to deposit the full amount. Leverage in stocks trading is available only with a linked margin loan.
Another point to admit is that stocks provide physical ownership and the opportunity to attend AGMs, whereas CFDs not. Nonetheless, both financial instruments allow receiving dividends and interest adjustments.
Lastly, CFDs give you the access to different asset types, including stocks as well. Other underlying assets are indices, currencies, commodities and so on.
Fees and taxes
In terms of fees collected, CFDs trading can be considered a winner in comparison to stocks. CFD brokers are mostly compensated through the cost of the spread with zero or very small trading commissions. Additionally, CFDs are free of Stamp Duty, because the asset is not physically owned.
At the same time, stocks trading involves the obligation to pay the Stamp Duty. Traditional stock brokers usually require a high commission for their services.
The Bottom Line
Both CFDs and stocks can be fantastic in their own ways. However, there is apparently less capital outlay in CFDs trading if comparing to stocks. In turn, the complete advantage of stocks is the availability of shareholder privileges.