Index ETFs Versus Index CFDs
3 min readWith the development of technology, there are many options for investing and trading for people looking into increasing their chances for passive income. If you are looking into trading indices from the stock market, there are different alternatives that you can choose. There are tons of ways to garner exposure to a stock index and the way you can possibly maximize this is by investing your money in the stock market.
You might become a bit overwhelmed when it comes to different articles suggesting forms of investments that you can do with index. However, if you still have doubts in the market, you may get into investing indirectly through Index ETFs and Index CFDs/ Trading CFD.
Index ETFs
Also known as Exchange Traded Funds, ETF are a very ideal form of trading and investment ever since it was formed. ETFs are synonymous to mutual funds and can be traded just like any stock that exists in the market. Index ETFs are representations of the underlying assets owned by traders such as currencies, commodities, stocks and bonds. When dealing with an ETF you are able to trade and choose a specific sector for your trading capital as these would usually add a higher form of liquidity, daily with very low fees compared to the usual mutual funds. This becomes the reason why most investors are attracted to this option.
Just like in Trading CFD, you do not need to own the underlying asset physically as you are merely speculating on the movement of the index in the market. Although great for long term investments, you are mostly able to look at them as an option to make short term profits. There are many strategies you can use to apply in your ETF trading like sector rotation, asset allocation and swing trading can be done. A lot of wide range features like hedging and short selling are also available for novice traders.
Index CFDs
Also known as Contracts for Difference, Index CFD is practically a recent addition and compared to Index ETFs, it is a contract or agreement between a trader and broker for a certain asset. As each would come into an agreement to pay the price between the opening and closing price difference of the contract. As you are Trading CFD, you are trading with derivatives and you usually just need to pay 10% to as low as 5% of the price of the asset that you take position for which enables traders to have utmost flexibility.
As you trade with CFDs, you are speculating on the direction of the index and you agree to trade the difference in price based on the opening and closing of a position. The best thing about CFDs is you do not only speculate on the rising of the market but also the closing.
Such advantages of going into this form of trading is the access to global markets and getting into exposure based on higher leverages available for traders.
Index ETF VS. Index CFD
Index ETFs have been around for longer than Index CFDs.
- With CFDs, you agree to receive and pay the difference in prices between the start and closing dates of the contract. With Index ETF, you literally have to pay the full price of the underlying asset.
- With CFDs, you can use the leverage and can be a multiplier for profits and even with losses. When trading Index ETFs, you do not lose more than what you actually put in as an investment.
- CFDs have interest for a period where you want to hold the position due to it being a magined product. With Index ETF, there are no charges to hold the position for a period of time.
- With CFD, if your underlying index exceeds your account’s available funds, the broker may request for you to deposit additional money while Index ETFs do not have such.
- Index ETFs are usually utilized to garner small gains for a longer duration while Index CFDs are utilized for strategies that are short-term in nature,
- Index ETFs would focus more on slowly gaining during a long period of time while Index CFDs have the potential to give out big rewards AND potentially big risk for loss.
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