CFD Trading or Margin Lending, Understanding the Key Differences

OlufisayoJune 7, 201604,664 views

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Different approach

Something to remember when it comes to CFD trading is that you never actually own the underlying asset. The one drawback in this situation is that you cannot change service providers because that specific asset is only available with that specific provider. These restrictions will not apply to something like margin lending where the trader will be allowed to move freely from one stockbroker to another whenever such a move seems profitable or desirable.

In most cases, those providers who deal with CFD trading will be able to provide more leverage than those providers that only deal with margin lending.

The most obvious benefit resulting from this is the fact that with CFD trading, you can generate a significantly higher return on investment even with a relatively low input amount. Therefore, the odds of 100 to 1 for CFDs compared to odds of 10 to 1 for margin lending is mostly what could be expected. In order to protect your investment, it is important that the trader should have some kind of the risk management strategy.

The more affordable option

Anyone who get involved in CFD trading will see that such an investment will be a lot cheaper when compared to margin lending, and even brokers who are providing opportunities will be charging only 0.1% for CFD trading while the cost for margin lending could be as high as 0.5%. It should also be remembered that interest charges relating to CFD trading is substantially higher than those which will apply to margin lending. Something else which should be considered by traders is the flexibility of each specific option and also how easy will it be to actually sell that option when necessary.

In most cases traders find that CFDs are much easier to sell than short selling and is even more difficult to achieve in the case of margin lending. There is also another difference between CFD trading and margin lending which traders should understand. In the case of CFDs, traders will receive a dividend, but they will not be eligible for franking credits, which margin lenders will receive. The reason for this is when it comes to CFD trading, the underlying asset is not owned by the trader, while on the other hand, with margin lending, there is ownership of the asset. However, with regard to short-term trading, these ownership issues actually benefits CFD trading.

Ease of use

Anyone with an Internet connection can engage in CFD trading as long as they understand how to use CMC Markets platform. These people have an online portfolio, which is updated all day long, but when engaging in margin lending, there will only be a solitary end–of-day update and this is why CFD trading is simply more versatile. When it comes to CFD trading, there is a significantly smaller risk because this trader has more control over their investment and is able to manage the risks significantly better, and also because of the frequent updates throughout the day, the traders are provided with more opportunities to take preventive measures should your investment show signs of failing.

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