Differences between CFD trading and margin trading.

[Hakiza]

Explain the differences between CFD trading and margin trading.

[Dan]

Hi Hakiza,

In CFD trading, you have the advantage of using margin. This implies that you will contribute a portion of the initial amount required, and your broker will lend you the remaining amount that you will repay by the interest for that loan. Leverage boosts your profits or losses.

In CFD trading, there is a high possibility that you will lose more than what you invest. The case is ordinarily different in share trading, where you will lose an amount equivalent to your initial investment.

In margin trading, you will own the underlying asset you are trading. In CFDs, however, you do not control the underlying asset. You will agree with your provider to exchange the variation in the opening and closing price of the underlying asset.

When you trade your shares using margins, your broker will keep a certain percentage of your securities as a guarantee that you can do away with if need be. In CFD, the broker will not hold any of your assets as security since you do not own the underlying asset.

Margin trading allows you to enjoy certain rights such as economic rights, voting rights, and tax benefits. The contract for differences will only guarantee your financial rights.

It is also easy to trade an asset in CFD trading since the brokerage fees are less against margin trading.

It is also important to note that CFDs are traded over-the-counter. This means that you make an agreement with your broker on the price you will sell the asset without necessarily following a certain index. In margin trading, you trade your asset in an open market.

In margin trading, it is like where the banks give you a regular loan. The only interest you need to pay is the amount and the period you take before you repay the amount. In CFD trading, you enter into a consensus with the CFD provider, and the interest you pay will not depend on the amount you borrow.

Both methods are good for investment purposes. However, understanding the critical elements in each and the risks that they carry will help you choose the best investment option.