How should we choose between CFD vs invest market access? When considering exposure to a certain asset, you will likely come across the question of how to access the market. Two of the most common ways to take a position are either CFD or invest.
Differences in CFD vs Invest style trading
There are quite some differences when considering between CFD vs invest type access to a market, but what are they?
During our research, it is clear that the main difference between a CFD and an investment account is that a CFD does not give you direct ownership of an asset, whilst when you invest you do.
The type of access that you choose to take a position in a market could be influenced by some of your goals. Find some of the main differentiators between CFD and invest market access below.
CFD vs Invest Comparison
|Can you short a position||Yes.||No.|
|Short/Long Term||Usually short term||Either. Most will invest with longer time frames in mind.|
|Tax Implications||No purchase tax, taxes on profits usual based on country of residence||Depending on tax jurisdiction, you can incur stamp duty or market access tax, aswell as taxes paid on any profit.|
|Costs||Is usual to have no market access fee, but using leverage you can incur costs. Possible to access markets fractionally, and due to leverage pay a proportion of the cost of the asset (from 3.33% – 25% depending on instrument and leverage used)||Depending on the broker, market access fee per transaction is possible. You have to pay the full value of the underlying position (100%).|
|Market Hours||Typically 24 hour access.||Each individual market is usually open for a 9 hour window.|
|Instruments||Stocks, Forex, Commodities, Indices, Cryptocurrencies (not for UK based traders), ETFs||Stocks, ETFs, Cryptocurrencies|
|Leverage||Yes. Varying from 1:2 for cryptocurrencies, up to 1:30 for forex majors.||No|
As you can see, there are quite a few reasons to choose a position either via CFD or invest, and although CFD trading has become a lot more popular in recent years, invest style market access is still far more common for certain instruments. There are many major brokers that offer both types of trading, and even those that cover this topic of CFD vs invest.
There are times when you are very unlikely to take a position in a market unless you do so via CFD or unless you really want to take physical ownership of an asset. If you were to consider taking a position in oil for example, the chances of you wishing to take physical ownership of oil barrels is going to be slim to none.
The same could be said for other commodities such as corn, soybeans, and all other physical commodities apart from metals. When choosing to invest in gold, silver, or platinum, a lot of people will do this as a store of value and as an inflation hedge as opposed to expecting massive growth.
For this reason mainly, people will usually want to hold onto that particular asset in its’ physical form rather than as a CFD, but that is not always the case of course. Each individual may have different preferences, but metals is the exception when it comes to commodities rather than the rule.
If you are looking to trade stocks, ETFs, or cryptocurrencies for example, you have the option of CFD or invest access to a market. In most cases, depending on the length of time you are looking to spend in a market, as well as whether you are interested in ‘shorting’ the position will make your decision a lot easier.
CFD vs stock – scenarios surrounding when to trade CFD vs Invest in stock
Trading CFDs, or investing in stock, are both hugely attractive propositions and are growing year over year among retail traders with more and more accounts being opened across the globe. As there is the opportunity to also trade stock as a CFD, it is quite a wide ranging topic. The basics of equities and pros and cons of CFD vs stock are also covered separately with our guide on leveraged equities.
You can see how to explore various cases where you may be considering between trading CFD vs Stock below. Let’s take a look at a few of these scenarios to see how that choice would play out in most cases.
- Take a position in an individual stock and are planning to hold for a long term period
CFD vs stock – Stock.
Why? – No margin fee, no overnight fees, no risk of being ‘stopped out’.
- Take a position in an individual stock but are expecting the price to decrease
CFD vs stock – CFD
Why? – execute as a CFD by taking a short position. Not possible to do this with direct stock.
- Take a position in an individual stock expecting price increase but wanting to exit after a short term
CFD vs stock – Either, but in most cases CFD.
Why? – Using a CFD in this case can allow you to use leverage to maximise the impact of your trade value and usually with no transaction or market fee to exercise the trade (barring spreads).
- Take a position in a stock outside of market hours
CFD vs stock – CFD.
Why? – You can usually execute your trade 24 hours a day via CFD platforms whereas with direct stock invest access, you will need to wait until market open (unless you use a platform that allows execution during the pre/post market period).
- Want to take an active role in a company who’s stock you are taking a position on (by voting in shareholders meetings, etc…).
CFD vs stock – Stock.
Why? – It is usually not possible for you to vote unless you are an actual shareholder and the stock is registered in your name by your counterparty. CFDs will not have you listed on the shareholders register as you merely taking a position rather than the physical ownership.
- Planning to invest less than the price of 1 share.
CFD vs stock –Historically, CFD but with the right broker partner today, either.
Why? – If you are intending to take a position in a stock such as Berkshire Hathaway, currently trading at over $430’000 per share and do not have just shy of half a million dollars to invest, you would usually take a position in the company via a CFD.
That is until more recently, and the introduction via certain stock trading platforms of the fractional share ownership. Therefore, you now have the chance to choose either model of market access in which case but you will still usually find that certain brokers will have fractional ownership minimum investment levels that are greater than those of a CFD trading platform.
Is everyone trading forex as a CFD?
In most cases yes.
If you are taking a forex position you are trading in a very similar way to CFD trading.
It is clear that unless you are using a foreign exchange transfer service, and actually opening accounts in multiple different currencies and switching your EUR to AUD, USD and GBP accounts, you are trading via methods very similar to CFD and are not taking actual ownership of those currencies.
There are differences in the way that forex and other non forex CFDs are impacted, and what can cause fluctuations, but the principle of the access type of forex and CFD is by and large the same.
Both the market access types rely on OTC (over the counter) access rather than DMA (direct market access) and your counterparty is not the direct exchange in these cases, but the trading platform, or broker that you are using to execute your position.
Does this matter?
If you have been trading via either method in the past, nothing has changed. Usually both market accesses allow leveraged trading, giving more power to your pound, and typically will only charge you spreads for market access.
You can still find you can pay trading commissions if you opt for a broker that provides ‘razor spreads’, in which case the platform will make money as a specific (and usually fixed) € value per lot on the volume you trade, rather than a varying spread based on the volatility of the instrument at the time. This ‘commission’ model is usually only available when trading forex rather than any CFD on other instruments.
CFD vs Invest summary
The short answer to whether you would favour CFD vs Invest access to a market is that there is no real short answer.
Many would take a different market access type depending on many variables and goals. Therefore, we would suggest that you carefully consider the type of access you would like to make into an instrument before you make a quick CFD vs invest decision.
If in doubt, feel free to revisit the tables above numerous times as you are going through various trades and ensure that you are taking the right call at the right time. We can also offer you a more detailed overview of what is a CFD here if you are still in doubt.