Contracts for difference (CFD) VS Exchange-traded funds (ETF)
There are many different ways of investing and trading introduced recently, which makes it difficult to know which one is the best for you. The most sought-after trading options today are CFD vs ETF. The key to understanding their differences is to develop a better knowledge of these tools before venturing into the trading world.
The basics
CFD
Contracts for difference (CFD) is a form of derivative trading that enables you to hypothesize on the rising and falling of global financial instruments such as shares, commodities, currencies, indices and treasuries, introducing higher risk but higher reward to your portfolio. Indices may be classified as national, global, industry or exchange based. CFDs have been around for fewer years than exchange traded funds (own the), yet they can still be traded on a number of different markets.
The trader does not have to own the underlying asset and based on the trader’s predictions of the price movement of the asset he can make considerable profits or losses. CFDs are a derivative which allows you to control and to make a profit from the change in price from a much higher value of security.
ETF
Exchange Traded Funds (ETFs) are an increasingly popular way of investing in the financial markets. It is seen as an ideal trading and investment instrument, trading like a stock but offering you the diversity of a mutual fund. It is a group of securities that you can buy and sell through a stock exchange or a brokerage company. ETFs are made up of a basket of related assets, from Stocks, Bonds, to commodities and currencies, making it a low-risk option for investment. ETFs have higher daily liquidities and lower fees than mutual fund shares, which makes it attractive to investors and traders and perfect for long term investments.
What’s the difference?
CFD enables you to buy and sell at a set price for a tracked asset. You are also able to reverse and close the contract with an opposite buy or sell in the same tracked asset. CFD allows you to increase trade leverage. By doing this, borrowing a larger sum for the trade increases your gains/losses making it risky, but you also get to decide when you want to close your position. ETFs, on the other hand, are a better alternative for those seeking a passive investment with a buy-and-hold type of strategy.
It depends on what your plan is as everyone has a different objective. The juxtaposition of these two trading options are that ETF’s have no on-going interest fees and requires you to invest your own funds (but as you please).
CFDs, on the other hand, only request a small margin fee, alas incurring overnight fees on the leverage obtained. In contrast to ETFs, CFDs are quick and accessible and allow you to make a profit when markets are falling. Before entering into either one of these trades, coming up with a good investment plan is key. Make sure to understand all the risks before making the big move. Gain the knowledge and familiarize yourself with the proper terminology. Ultimately, it would be advantageous to refer to key strategic portfolio investment plans, in order to grasp the fundamentals of trading in the capital markets.
