Margin Lending vs. CFDs

[Miro]

I've had an account with CommSec for a few months now and I've been investing mainly into low risk shares. I also have a margin account.

A few weeks ago I opened up an account to trade CFDs. I was wondering what's the difference between trading on margin with e.g. CommSec and trading CFDs in terms of the cost of borrowing.

CommSec - 8%
CFD provider - official cash rate (3.25%) + up to 3%

It seems trading shares as CFDs makes more sense than trading with a margin account. You still get the dividends etc. and you pay less fees. Of course you can't trade all shares and you have to be more careful with risk.

Are there any disadvantages?

 

[RamonR]

I have done all my trading through margin loans but just attended a comsec seminar on CFD's.

My plan is to continue to use margin loans for long trades but cfd's for short trades.
By using margin loans for long trades I have the option of holding the shares for 45 days and become eligible for franking credits as well.

Also in the future when I have paid off my personal debt I will tend towards keeping my profits from trading in the shares I traded

 

[Sulfuras]

I also have these accounts with ComSec and i've done a bit of research on the same thing, and while you probably have a better idea now considering this thread was made about a year ago heres my 2 cents.

You're right that the CFD interest rates are slightly lower (with ComSec) and you can get greater leverage through CFDs. But here are a few main things that you should take into consideration when deciding which approach to take:

1. You do not receive franking credits with long CFD positions but you do with stocks acquired using a margin loan. (which may make a Margin Loan a better approach in some long term investments especially those that you are relying on income through dividends)
2. For CFDs interest is paid on the total value of your position not just the amount borrowed, that means you are paying interest on your upfront contribtution. This is not the case with margin loans which are a line of credit (Again higher funding costs can make a big difference in the long term.)

These reasons and a few others (consider that CFDs are synthetic and do not entitle you to the same rights as ordinary shareholders such as voting, rights issue etc.) are probably why most people say that CFDs are more suited to short term investment approaches while a margin loan is more suited to a long term investment approach.

Any other ideas would be appreciated!