The world is getting smaller every day. Companies are making it easy to do business around the world and you are no longer limited to what’s available in your local market. But investing in global opportunities still remains difficult. Which begs the question, why is it still so hard to buy international securities? Global investing opportunities are everywhere but the barriers to entry remain high…until now.
Enter Stock CFDs – or a stock contract for difference. Stock CFDs allow traders to profit off the rise and fall of individual global stocks without the need to own the stock outright. This makes international investing more accessible with a lower entry cost than traditional global equity trading.
A contract for difference (CFD) is a derivative that tracks the performance of an underlying financial security. When a trader purchases a CFD, they do not own the underlying financial instrument. Instead, they are simply purchasing a contract whose value rises and falls with the price of the instrument that it tracks.
Opening the doors to the world
Traders are often hesitant to buy international stocks due to the difficulties involved. Generally it isn’t done online and they will have to call a broker over the phone to buy and sell. The varying time zones mean the market might not even be open, which adds significant execution delays. Ironically, it often takes longer to execute an order than traders would normally hold onto the actual position. Throw in high commissions, currency exchange costs, and other additional fees (for example, the London Stock Exchange has a stamp duty of 0.5% on the value of the trade, and the Hong Kong exchange charges 0.1%) and most traders find they’re better off focused on domestic exchanges, even if that means missing out on significant international opportunities.
Stock CFDs eliminate several of these challenges and are becoming increasingly popular because of it. Brokers are taking notice and starting to make it easier for traders to access these investments. Canadian online brokerage Questrade, has recently released stock CFD trading earlier in 2019. Upon the release, Edward Kholodenko, President and CEO of Questrade, announced “It’s increasingly important to give traders the access to international markets they’re looking for. And stock CFDs are a great cost efficient investment alternative to do exactly that.” These cost efficiencies come from the fact that stock CFDs are not subject to international levies. In addition, they often have lower commissions than buying international equities. They are available to trade outside of normal domestic trading hours, 6 days a week and include access to large international markets (London, Frankfurt, Hong Kong, Australia, to name a few).
They’re also margined products. This means, by using leverage, traders can trade long and short with less capital than traditional methods of buying a stock outright. For example, a stock CFD with 15% margin, means only $150 is required to hold a $1,000 position. When used properly, leverage can be a very effective tool, allowing traders to act on opportunities restricted by insufficient capital (in the case of high priced shares), or to profit in falling markets. It can also amplify profits. Assuming the correct direction of the stock, this can be very appealing. However leverage is a double edged sword. While it can amplify returns, it can amplify losses to the same degree.
Stock CFDs are not without some of their own costs. In addition to commissions and currency exchange fees, traders who hold CFDs overnight are also charged financing costs, which can eat into profits over time. This makes them a better option for those looking for short-to-medium term exposure rather than long term investors.
Stock CFDs have many advantages: low cost online access to global markets, great flexibility and many opportunities to use leverage to your advantage. However, they do come with risks. For traders looking to take the plunge, it’s important to review the potential rewards versus the risks involved, and if you’re comfortable trading with the necessary degree of risk. Because globalization is only going to continue to impact our daily lives more often, with Stock CFDs, traders no longer need to sit on the sideline when a global opportunity presents itself.
Traders interested in learning more about how to trade stock CFDs can visit forex.questrade.com for more information.
© 2019, Questrade, Inc. All Rights Reserved.
Questrade, Inc. is a registered investment dealer, a member of the Investment Industry Regulatory Organization of Canada (IIROC) and a member of the Canadian Investor Protection Fund (CIPF). Trading in CFDs involves substantial risk of loss and is not suitable for all investors. For a full understanding of the risks involved, we encourage you to read and understand leverage and risk.
The information contained in this article is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.