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Trading uncovered: CFDs versus spread trading

by , 17 June 2015

If you've decided that trading is for you, there are a number of different instruments you can use to do it.

For example, if you want to trade the price movements of shares you could trade contracts for difference (CFDs) or you could spread trade.

So what is the difference between these two forms of trading?

Read on to find out…

The similarities between CFDs and spread trading

CFDs and spread trading are similar as they’re both over the counter products. This means you trade them through a market maker and not a formal exchange.

On the other hand, single stock futures are standardised products as you trade these through the Johannesburg Stock Exchange’s Derivatives Market.

CFDs and spread trading are also similar in that you trade on margin. This gives the gearing (money-multiplying) effect to these instruments.

The differences between CFDs and spread trading

When you spread trade, the charges are all included in the spread between the buying and selling prices of shares. This is how spread trading companies make their money.

With CFDs it can be different. Whilst you still have to cover the spread, you may have to pay brokerage fees for entering and exiting the trade too.

You also have to pay a daily financing charge with CFDs. This is because CFDs don’t have a fixed expiry date. The trade remains open until it either hits your take profit or stop loss, or you decide to exit the trade.

If you put on short CFD trades, you receive the daily financing charge.

You don’t pay a daily financing charge with spread trading as this cost is included in the spread as spread trades have fixed expiry dates.

CFDs can appear more transparent as you’re trading the underlying share price. Spread trading has all the costs included in the spread.

So there you have it. CFDs versus spread trading.

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Trading uncovered: CFDs versus spread trading
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