What’s the difference between an ETF and a CFD?
ETFs and CFDs are some of the most commonly traded items at the financial markets. An exchange-traded fund (ETF), is described as an investment fund traded on the stock exchanges. A contract for difference (CFD), on the other hand, is a contract that is signed between two parties, and which states that the seller of an asset will pay the buyer a difference in the value of the asset at the contract time. While ETFs and CFDs are commonly cited, they are not the same thing. There are quite a number of differences that exist between the two forms of investment. Investors thus need to know these differences before they commit to an investment.
ETFs are generally considered to be low-cost investments. This is because they come with only one annual fee and they do not have ongoing interest rates. This is not the same case with CFDs though. CFDs come with a great amount of leverage and there are interests charged. It is also not possible to lose more than you have invested in the ETF market, but in the CFD market, you can incur losses that are much higher than your original investment.
The Risks and Returns Involved
The main issue of importance when analyzing CFDs vs ETFs is the risk in the market. In the CFD market, the common premises of investors is to make huge profits by leveraging the opportunity that is available in the market. Investors can make great earnings when they trade a huge component of contracts. The level of risk involved with large investments is also very high in the CFD market. This is because there are many things that could happen between the time when a contract is signed to the time when it is due.
With ETFs, the main goal is to make money passively without being overly involved in the markets. The premise of an ETF investment is to receive returns from the discrepancies of a particular index. You can find ETFs being traded in the normal stocks market just like other commodities. In general, both ETFs and CFDs can be considered to be low-cost investments. They are however different in actual values since CFDs are initially cheaper than ETFs. CFDs also have more flexibility when it comes to the scope and range of trade. ETFs have characteristics that make them like traditional assets.
Since ETFs generally have similar characteristics to traditional stocks, their trading periods also tend to be in the range of shares trading. As for CFDs though, the short-term trade is what dominates the market. There are huge risks involved in this market and the rewards are also huge in the short-term. ETFs have smaller gains in the long-term and the strategies made by investors put into consideration the amount of time needed to gain profit. The differences between ETFs and CFDs are therefore stark. The strategies involved in trading are similarly very different.
Investors who decide to get into the ETFs market often have an objective of capitalizing in certain sectors of the global market. The most common of these sectors is the large-capitalization global equities market. There are several ETF markets specifically designed to give investors access to investment opportunities in the world market. By trading in the emerging market equities, most investors are able to earn a profit after a considerable amount of time. Benefits are therefore available for investors who have insights about these markets. There are drawbacks associated with the trade, nevertheless. One of the key drawbacks of the markets is that there is no access to expert analysis nor stock selection.
An investor in the ETF market might thus end up investing in opportunities that they would not otherwise consider for investment. In addition, the market forces can act on prices of shares in the market. If particular shares are on demand, their prices might go up significantly. The effect of this would be increasing investments into the companies whose prices are already up. A fall in the prices would result in investment in low-priced assets.
For most investors, therefore, CFDs are opportunities that are used for speculation purposes. As for ETFs, the long-term investment is the only option. Both opportunities are great options for investors who are acquainted with the markets. It is nevertheless, important to understand the risks in the market before making investments in either market.
- Software engineer in finance: A millionaire in 4 years?
- 10 best budgeting and personal finance apps
- Finance platform Saifu is now using Thales to increase their security