When contracts for difference (CFDs) first launched in Australia, there was quite a bit of apprehension from traders. You had access to quite a lot of leverage and trading costs were very low.
For many share traders and options traders, the deal just seemed too good to be true. So, CFDs vs Stocks? What is the best instrument for your trading needs and your portfolio?
Keeping in mind when CFDs first launched in Australia back in 2002, you could trade the TOP 200 ASX shares at 5% margin with NO BROKERAGE.
When CFDs launched, CMC Markets was called ‘Deal for Free’, providing commission-free trading on the top 200 ASX shares.
Without pointing out the obvious, the benefits of trading CFDs versus trading stocks was very clear:
Unfortunately, commission free trading on CFDs didn’t last long.
Certainly, in 2018, there are no CFD brokers in Australia offering commission-free trading.
Low commissions
When we first launched this site, minimum brokerage levels to trade shares was $19.95. Commsec was leading the way, and as far as clients numbers, Commsec still leads the way.
Across the board, CFD brokerage tends to average around 0.08% or minimums as low as $5.
In 2018, share brokerage has gotten a lot more competitive with IG Markets now offering share trading from $8 minimums. Incredible. What a fantastic world we live in.
Previously, CMC Markets stock broking was the leading player for low brokerage, coming in at $9.95 minimums.
CFDs used to have a huge advantage of stocks in terms of commissions. But in 2018, those margins have been pretty much eliminated.
Access to more markets from the one account
In 2018, traders want greater freedom in products to trade. CFDs provide a massive benefit over stocks in this regard.
A few brokers, like IG Markets, CMC Markets and SaxoBank, now allow you the freedom to access more than 10,000 instruments from the one account.
With a stockbroker on the ASX, UK, US or Asia, you only get access to the local market.
For some traders, the freedom to access the global markets and trade around the clock is a huge advantage of straight stocks.
When it comes to franking credits, most short-term traders don’t hold the stock long enough to get the franking credits anyway.
Let’s get straight to the point. If you have little trading capital (from $1,000 to $10,000), then your choices for stock trading can be somewhat limited.
The reasons for this are pretty straightforward.
If you make a $2,000 trade with a stock broker like Commsec, where your share brokerage is $39.90 for a complete trade, it will eat significantly into your trading profits.
Just to break even, your $2,000 position has to go up 2%. Now that may not seem a lot initially but what if you are doing a number of trades in a month?
Each position now has to gain 2% just to break even.
If you have less than $10,000 starting capital, the following example may be useful.
CFD Account with zero leverage to compare a share trading account.
|
Capital |
$10,000 |
|
Leverage Used |
Zero |
|
Trade Size |
$2,000 |
|
Brokerage |
$12 |
|
% to break even |
0.6% |
|
Daily Finance cost |
$0.51 |
Now consider a share trading broker is charging $39.90 for a round trip.
|
Capital |
$10,000 |
|
Leverage Used |
Zero |
|
Trade Size |
$2,000 |
|
Brokerage |
$39.90 |
|
% to break even |
2.00% |
|
Daily Finance cost |
$0 |
In the example above, you can see it costs approximately $0.51 per day to hold a $2,000 position overnight when trading CFDs. Therefore if you get charged $39.90 to get in and out (round trip), then your break even point with your CFD trade is 78 days.
So before we even introduce leverage into the comparison, most shorter time frame stock traders would be better off making the switch to CFD trading.
Another point to consider with your $10,000 CFD account is if you decide to use CFD leverage which is the primary benefit of CFD trading.
The beauty of Contracts for Difference (CFDs) is that with your $10,000 cash in your account you could now access say 2-3 times that amount and take total positions equivalent to $20,000 – $30,000, which you can’t do with a share trading account.
Trading at 2-3 times leverage on your account gives you greater access to more opportunities compared to a stock trading account, which has no leverage.
Do keep in mind the risks associated with CFD trading on higher leverage. Don’t get silly.
In 2018, many CFD brokers provide the opportunity to trade the entire ASX stock market. So the top 500 stocks may have margins ranging from 5%-50%, and above the top 500, you may need 50% – 100% margin.
For the low cap specky stocks, you often need 100% margin, but you can still trade them from the one account. That is very handy.
So if you like to trade the low-cap stocks, then a standard share trading account might be the way to go. Especially if you don’t like to pay overnight financing, considering you may need to put up 100% for the trade.
CFD trading gives you access to dividends just like you would trading stocks except for one small difference.
When trading CFDs, you do not get any franking credits on dividends earned.
Franking credits (sometimes called imputation credits) are designed to prevent the double taxing of income as the companies paying the dividend have already paid tax on the earnings of the company, so you don’t have to.
NOTE: To receive full franking credits when trading shares you do need to hold your position for a minimum of 45 days.
There is simply no comparison here as CFDs win hands down on the short selling front. Unfortunately, short selling can only be done with a full-service broker when trading stocks.
This can be quite restrictive as your full-service broker will have to find someone on the other side of the trade to borrow the stock. Plus the trading costs can be quite high with a full-service broker.
Conversely, short selling CFDs is simple. You have access to approximately 200+ share CFDs and margins are normally from 5-30%, and there are fewer restrictions.
Keep in mind that CFD providers have to hedge themselves in the physical market from time to time, so they have to try and find the other side of the trade too.
On occasions, you may try to place a short sale on a share CFD only to find your CFD provider won’t allow you. This would normally mean they can’t find the other side to hedge themselves.
This is more prevalent with DMA CFD brokers compared to Market Maker models.
Once again, CFDs are the clear winner here. You just cannot place a guaranteed stop when trading stocks, however, most CFD providers will allow you to place a guaranteed stop when CFD trading. There are usually restrictions on doing this but at least they are available.
When it comes to CFDs vs Stocks, the advantages lead in favour of CFDs, especially if you trade over shorter timeframes.
If you love trading just stocks but are worried about the leverage aspect, then trade at zero levels of leverage. The main benefit of doing this is you have the ability to short sell when markets are falling.
At the end of the day, the decision to trade CFDs vs Stocks is up to you. But the ability to trade share CFDs, Indices, Forex, Commodities and other global stock exchange from the one account, might sway your decision.