Traders and investors can manage portfolios using various asset structures, but which one is right for your requirements and strategy? Do you require physical ownership of the underlying asset or exposure to price action? Can you accept expiry dates and legally binding obligations to deliver assets at a future price? Before you decide which assets suit you the best, learn about CFD trading versus futures, stocks, and options, and understand the pros and cons of each from my snapshot below.
Contracts for Difference (CFDs) are over-the-counter (OTC) derivatives that provide traders with 1:1 exposure to the price action of the underlying asset without physical ownership. CFDs became the most efficient trading-specific asset class. CFDs are available for leveraged trading, and traders can go long and short, hedge portfolios, and never have to worry about expiry. Please note that CFDs are for short-term trading, not long-term position building.
Futures are legally binding contracts to deliver the specified asset quantity at the contract date and price. They are ideal for hedging against expected volatility and best suited for companies to control costs, especially in commodities trading. Futures expire, but traders can roll them over to the next contract.
Stocks grant physical ownership of the underlying company. They are best suited for retirement accounts, long-term buy-and-hold portfolios, position building, and corporations seeking ownership control of companies. Stocks are unleveraged and have no expiry, but companies can go out of business, rendering their stocks worthless.
Options grant the contract holder the option but not the obligation to take ownership and delivery of the underlying asset. They are low-cost hedges, but contracts are worthless past expiry. Traders can go long and short and use leverage.
Should you choose CFD, futures, stocks, or options trading? The choice depends on your personal preferences and requirements, but you can consider the following aspects to help you decide.
CFDs vs. futures, stocks, and options:
- CFDs are the most efficient kind of asset wrapper, and the best choice for most types of traders
- Futures are legally binding contracts best suited for commodity-centric companies
- Stocks are for underlying ownership and are best suited for retirement accounts
- Options are a low-cost hedge for traders who have no access to CFDs
I recommend traders understand the pros and cons of CFD trading vs. futures and options to structure their portfolio and strategy accordingly.
|
CFDs Pros |
CFDs Cons |
|
Best-structured asset for leveraged traders |
None |
|
Highly liquid |
|
|
Long and short positions |
|
|
No expiry |
|
Stocks Pros |
Stocks Cons |
|
Best-suited for buy-and-hold portfolios |
Unleveraged |
|
Global availability |
Higher capital requirements |
|
Ideal for position trading |
|
Options Pros |
Options Cons |
|
Highly liquid |
Lose all value after expiry |
|
Low-cost hedging |
|
|
Long and short positions |
|
|
Leveraged trading |
|
Futures Pros |
Futures Cons |
|
Highly liquid |
Legally binding contracts |
|
Leveraged trading |
The least flexible derivative contract |
|
Ideal for portfolio hedging |
Traders should evaluate the similarities and differences between CFD trading versus futures, stocks, and options to make the best choice for their trading requirements.
Here is a snapshot of the similarities and differences between CFD, futures, stocks, and options trading:
|
CFDs |
Stocks |
Options |
Futures |
|
|
Instrument Type |
Derivative |
Physical asset |
Derivative |
Derivative |
|
Leveraged trading |
Yes |
No |
Yes |
Yes |
|
Short selling |
Yes |
Yes |
Yes |
Yes |
|
Trade size |
1 |
1 |
100 |
Depends on the contract |
|
Cost structure |
Spreads and commissions |
Spreads and commissions |
Contract and clearing fees |
Contract and clearing fees |
|
Availability |
Banned in the US |
Global |
Global, but US-specific |
Global |
|
Where to trade |
Multi-asset brokers |
Equity brokers |
Options brokers |
Futures brokers |
|
Incurrs Tax liabilities |
Yes |
Yes |
Yes |
Yes |
|
Asset availability |
Forex, stocks, commodities, indices, ETFs |
Stocks, ETFs |
Forex, stocks, commodities, indices, ETFs |
Forex, stocks, commodities, indices, ETFs |
|
Risk |
High |
Medium |
High |
High |
|
Flexibility |
High |
Medium |
High |
Medium |
|
Liquidity |
High |
High |
High |
High |
|
Physical ownership |
No |
Yes |
Optional |
Yes |
|
Trading venue |
OTC |
Broker |
Exchange |
Exchange |
The choice depends entirely on the trader or investor. I recommend answering the questions below to decide which asset to trade.
Answer the following questions:
- Do you seek to trade using leverage? – CFDs and options
- Do you want to build a retirement or dividend portfolio? – Stocks
- Do you want to implement hedging strategies? – CFDs, options, and futures
- Do you want to go long and short? – CFDs, options, and futures
- Do you require flexibility? CFDs and options
CFDs are the best choice for most traders, while stocks are the only choice for retirement accounts, long-term buy-and-hold investors, and dividend portfolios. I recommend options only for traders without access to CFDs, while futures are best for commodity-centric companies to hedge operations.
