The main difference between stocks and CFDs is that stocks represent ownership in a company, while CFDs are a contract between two parties that allows them to trade on the difference between the price of an asset at the time of purchase and its price time sale. In effect, this means that CFDs offer a high degree of leverage since they require less capital to be traded than other types of investment products.
Another key difference is that stocks are generally considered a more long-term investment. At the same time, CFDs are more geared towards active traders who want to take advantage of price movements in specific sectors or niches without buying individual companies. ETFs also tend to be highly liquid and have low fees associated with them.
However, there are also a few disadvantages to consider when comparing stocks and CFDs. For one, stocks are more volatile than CFDs, meaning they can experience sharper price movements and losses. Secondly, stocks offer investors the potential for capital gains if the company’s stock price goes up, while CFDs do not generate any dividend income.
The pros and cons of stocks and CFDs
There are a few different options available to Singaporean investors regarding trading. You can trade stocks, exchange-traded funds (ETFs), futures, options, and contracts for difference (CFDs). Let’s look at the pros and cons of stocks and CFDs.
Stocks
Pros: Stocks are a widespread investment vehicle and are therefore very liquid. This means that you can buy and sell them quickly, and you can do so at any time during the trading day. They also offer the potential for capital gains if their stock price goes up.
Cons: One downside of stocks is that they can experience sharp price movements in either direction, resulting in significant losses if you buy at the wrong time. This is especially true for penny stocks that are traded on the SGX Mainboard, which tend to be more volatile than other types of stocks.
CFDs
Pros: Contracts for difference (CFDs) are derivative products that allow investors to trade on the difference between the price of an asset at the time of purchase and its price at the time of sale. In effect, this means that CFDs offer a high degree of leverage since they require less capital to be traded than other types of investment products.
Another advantage of CFDs is that they allow traders to go long or short on an asset. This means that you can make money whether the market goes up or down! Lastly, more complex orders like stop-loss limits and futures options are also available with CFDs.
Cons: CFDs do come with some disadvantages as well, though. Firstly, many financial institutions charge a fee to access their prices and buy or sell a CFD. These vary from institution to institution but usually end up being about 1% of the order value. This can add up pretty quickly for larger orders.
CFDs have a high degree of risk associated with them. They also have a sharp daily loss limit, and a large amount of margin is required when trading CFDs compared to other investments. They are generally unsuitable for beginner traders or long-term investors who do not actively trade their portfolios every day.
Furthermore, you are not buying the asset when you buy a CFD. Instead, your money goes into an account used as collateral against your trade. As such, if the price moves against you and you make a loss on the trade, your initial capital is also lost since it has been used as collateral against the position.
Conclusion
When comparing stocks vs CFDs in Singapore, both products can be used as an investment tool by savvy investors who know what they’re doing. However, beginners should probably stick to stocks, as CFDs can be pretty risky and unsuitable for everyone. In the end, it all comes down to personal preference and the amount of risk you’re comfortable with taking on. We recommend you contact a reputable online broker from Saxo Bank and trade on a demo account before investing your own money.
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