ETFSs and CFDs are the top trading instruments we have today in the markets. They are both great, and that’s why most traders fail to differentiate them. In this article, we will go through each one of them to help you differentiate them better.
A CFD is a financial instrument which allows traders to benefit from the price fluctuations, of commodities and stocks without purchasing them. CFD trading works similarly to forex trading. You can select the instrument that you want to trade and then enter your order. Like the other types of trades, you can buy more of the products which you think that its future price will increase. For example, you can purchase more crude oil if its future price looks promising.
Benefits of CFD trading
- Trade both the short and long positions- you can open both the long and short trading positions this gives you a wide range of trading opportunities.
- Instant execution of orders- many CFD online trading platforms provide an immediate exception of orders. Again, this provides more trading opportunities as well as the ability to react better to the market conditions.
- Low commissions and fees- CFDs have lower charges as compared to the stock purchases. Most brokers do not charge fees for closing and opening positions
- Trade using leverage- you can use leverage to trade CFDs. This allows you to have more significant control of the market with small capital requirements.
CFD trading cons
- You can overtrade- overtrading is a common mistake to traders, and it can easily happen in CFD trading to the speedy transaction involved.
- You can quickly lose everything you will lose all your investments if your position drops below a particular point.
- Financing fee-brokers will put a financing fee on your trades if you keep on trading over the weekend and on weekends.
Exchange trades funds combine the features of both stocks and index finds traded on the primary exchanges. An ETF is the number of stocks which has been packaged to be sold as a single entity. ETFs can be sold at any time. Today, there are thousands of ETFs traded on the major trading exchanges. They do not only represent the stock indexes but it also various business sectors and industries. ETFs have both negative and positive aspects that a trader consider before trading them
Benefits of ETFs
- Liquidity– ETFs have high liquidity which means that a trader can sell their trading with ease.
- Tax efficiency- ETFs are purchased and sold on an exchange platform, and so the trader does not incur a substantial capital; gains tax liability.
- Diversity- currently, there are more than 600 ETFs which give the traders a large option to choose from.
- Trading fees and commission- ETFs are traded on short term speculations which reduce the traders’ returns.
- Limited diversification- most ETFs experts do not provide enough diversification
Differences between ETFs and CFDs
- A single trading instrument is used in CFDs, while many instruments are used in ETFs
- The potential reward in CFDs is higher as compared to ETFs
- CFDs do not have a portfolio diversification which is available in ETFs
- The level of risks involved in CFDs is very high since many activities take place. On the contrary, ETFs are cheaper as very few risks are involved in the trading.
- CFDs should be traded by the expert trading who have a unique mastery of the trading markets. On the other hand, ETFs are suitable for young investors.
Which one should I trade?
Both ETFs and CFDs are ideal market trading options. However, as noted, ETFs are most suitable for beginner investors’ since the risks involved are less. CFDs are particularly used for market speculation purposes, and a trader must, therefore, have detailed information for both options so that they can make wise decisions. One must also be acquainted with the current market trends in both cases. The choice on whether to trade ETFs or CFDs should, however, depend on the trader’s ability to withstand risks.