To leverage, or not to leverage? Here’s a look at the differences between stocks and CFDs, and which one is right for your investment style.
Over the past year, we’ve seen the investment world light up with success stories of investors multiplying their wealth and becoming millionaires — be it through investing in cryptocurrency, or getting in on the meme stock game at the right time.
If you’re looking to supercharge your returns by trading more with less, you might have come across CFDs. So, how does it differ from the more common stock investment and should you be tapping on CFDs instead to grow your wealth?
Here’s a look at investing in stocks vs CFDs.
What are stocks?
Stocks are the shares of a company that is traded on a stock exchange. The price is determined not just by the fundamentals of the company (such as their profitability, revenue, profit margins etc.), but ultimately by market demand and how much investors are willing to pay for the stock.
Companies can choose to list on a stock exchange of their choice, like how Sea Limited, a Singaporean company, is listed on the New York Stock Exchange (NYSE), while Grab is looking at an upcoming listing on the Nasdaq.
When you purchase a stock, you become a shareholder of the company. This means you’ll be entitled to the perks of being a shareholder, such as receiving dividends in cash or scrip, attending annual general meetings and enjoying ad hoc distributions such as bonus shares.
With stocks, you grow your wealth by maximising capital gains (when the stock goes up over time) or consistently receiving dividend income.
Stocks that have the potential to drive capital gains are typically value stocks and growth stocks. For investors looking for a passive income stream, investing in dividend stocks are the way to go, with blue chip stocks and real estate investment trusts (REITs) offering attractive dividend yields.
As long as you have a brokerage account, be it a custodian account or a CDP-linked one, you can purchase shares of a company at a price that you’re comfortable with.
What stocks can you purchase? You can purchase the stocks of any company listed on the exchange, as long as you can afford it. You can start by looking at the companies you use on a daily basis, such as Apple, Facebook and Netflix, or DBS, CapitaLand and Sheng Siong closer to home.
It would also depend on the market that your brokerage has access to. To give yourself greater flexibility, try to choose a stock brokerage account that offers access to multiple markets, such as Singapore, US and Hong Kong.
Besides purchasing the actual stocks of a company, you can also purchase stock exchange traded funds (ETFs) for greater diversification, at an affordable cost.
What are the costs you incur trading stocks? The main cost when purchasing shares would be the commission fee. This can typically range from 0.08% to 0.28% depending on the brokerage account you’re using. Custodian brokerage accounts (rather than CDP-linked ones) tend to have lower commission fees. There could also be a minimum fee involved, which is the minimum amount of fees you’ll be charged for the transaction.
Read more about custodian accounts, CDP-linked accounts, brokerage account fees and the best brokerages in town here.
|You own the share and enjoy the privileges of being a shareholder of the company||Have to purchase stocks for the full amount and meet the minimum lot size|
|Straightforward way of investing, either through capital gains or collecting dividends||Trade only when the stock market is open|
|Get dividends credited directly into your account|
To take action and start investing in stocks, read our handy step-by-step guide.
What are CFDs?
CFDs refer to Contracts For Difference (CFD). With CFDs, you trade the markets without actually owning the underlying asset. Instead, you enter a financial contract with the CFD provider, where you speculate and trade the difference in price of the underlying security.
For example, if you think Tesla’s share price will rise in the short term, you can buy a stock CFD at its current price. When Tesla’s share price goes up, you then sell this CFD at the higher price. You will pocket this difference in the price of the opening and closing prices of the contract.
When you trade using CFDs, you have the benefit of using leverage, where you can trade securities at just a fraction of the full trade value. This allows traders to open larger positions than their capital on hand would allow. However, it must be emphasised that leverage is a double-edged sword — not only can you amplify your profits, but also your losses.
Unlike trading shares, CFDs also allow you to ‘long’ or ‘short’ a stock, depending whether you think the share price will go up or down.
What CFDs can you purchase? You can trade CFDs for a variety of products, including stocks, commodities, forex, indices and even cryptocurrencies. CFD provider platforms typically offer a demo account that allows you to explore and get acquainted with the platform before you use the actual account to make trades.
What are the costs you incur trading CFDs? You incur a commission fee for trading CFDs. There could also be a minimum commission fee required. On top of commission fees, you could also incur a spread.
|Use leverage to trade more, with less capital||You don’t own the underlying security|
|Can do both ‘long’ and ‘short’ trades||Leverage not only magnifies your gains, but also your losses|
|Trade at any time of the day, not just when the stock market is open|
So, stocks vs CFDs — which is for you?
Choose stocks if…
If you’re more of a long-term investor, stocks could be what you’re looking for. By owning the stock, you become a shareholder and enjoy privileges such as receiving dividends directly into your account, or being offered scrip dividends.
Beginners to trading and investing could also find stocks to be an easier way to get started, being a straightforward way to enter the markets without increasing your risk by introducing leverage.
Choose CFDs if…
If you’re more of a short-term trader keen to use leverage to make your trades more impactful, CFDs could be the weapon of choice. It would also be the go-to option if you’re looking for flexibility in your trading, not just going ‘long’ but also to ‘short’ trades as well.
|Underlying security||Equities only||Wide range of securities, including stocks, commodities, forex, indices and cryptocurrencies|
|Trading hours||Only when the market is open||Any time of the day|
|Type of trade||‘Long’ only||‘Long’ or ‘short’|
|Suitable for||Long-term investing||Short-term trades|
Stocks and CFDs are not mutually exclusive. You can always dabble in a bit of both.
For example, you can directly purchase shares for the long-term pie of your portfolio, while opting for CFDs when looking to do short-term, or even intraday trades. While there are brokerages that are more specialised for either option, there are also brokerages that allow you to trade both types of products.
Regardless of which you choose, you can use SingSaver’s handy comparison platform to compare the best providers around.
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