Roberto D’Ambrosio is the CEO of Axiory Global, a leading name in the financial services industry renowned for its innovative approach to trading and investment solutions. With a career spanning over two decades, Roberto brings a wealth of experience in financial markets, risk management, and regulatory compliance. His expertise and forward-thinking vision have been instrumental in positioning Axiory Global as a trusted and dynamic player in the world of finance. In this op-ed, Roberto delves into the nuanced differences between Stock CFDs and Exchange-Traded Stocks, offering valuable insights for both novice and experienced investors.
As always when it comes to personal finance and trading, investors must know the characteristics of the instruments they intend to use, so, briefly, let’s start from basics: Stock CFDs vs. Exchange Traded Stocks, OTC Markets vs. Regulated Exchanges, and their main features.
Within Over-the-Counter (OTC) Markets, price formation is less transparent compared to regulated exchanges and might suffer of liquidity issues. Prices are typically determined by the broker-dealer network based on supply and demand and may include a wider spread. While in general this statement is correct, truth is that the liquidity of such markets, especially if we look at FX CFDs and major stocks CFDs, has greatly increased during the last decade and it is very unlikely to experience discrepancy with the prices of the underlying stocks. Plus, the regulatory scrutiny has increased, and Regulators know were to look for to spot unfair brokers-dealers. These entities facilitate trades and may act as market makers, providing liquidity by quoting both buy and sell prices and are in turn connected to larger entities acting as liquidity providers.
Within regulated exchanges: price formation is highly transparent, with prices determined by the continuous matching of buy and sell orders in a central order book. The different liquidity of each level of the book is known to market participants (with different levels of depth depending on the type of account). Intermediaries on regulated exchanges include brokers, who execute trades on behalf of clients, and market makers, who ensure liquidity by continuously quoting buy and sell prices.
Thank said, lets dig into the specific differences, pros, and cons of Trading CFDs versus Exchange Traded Stocks
One of the most significant advantages of CFDs is the ability to use leverage. Traders can control large positions with a relatively small amount of capital, amplifying potential returns. Leverage allows traders to maximize their capital efficiency, potentially achieving higher returns on investment. The use of leverage though also increases risk, as losses can exceed the initial investment, leading to significant financial losses if the market moves against the trader.
CFDs typically have lower entry costs compared to purchasing the underlying asset. There are no stamp duties or physical ownership costs.
Furthermore, CFDs provide the ability to profit from falling markets by short selling, which is not always straightforward in traditional stock trading which require the mechanism of “lending” the stock from the broker to the client, so he can sell it and bay it back to return it to the broker. Such lending carries higher costs compared to shorting a CFD, which is an OTC derivative.
CFD trading platforms are easily accessible to the wide public, usually offer rapid trade execution and advanced trading tools.
When it comes to buying stocks on regulated exchanges, they grant ownership, including voting rights and dividends. Stock exchanges are heavily regulated, providing a higher level of investor protection and reducing counterparty risk.
Traditional stock trading generally does not involve leverage, minimizing the risk of losing more than the initial investment.
From the above, we can derive that in order to take full advantage of the cons associated with trading CFDs and minimize the risks, the choice of the intermediary and the jurisdiction in which it operates is key.
The UAE’s financial market is growing, with an increasing number of brokers offering CFDs on local and international stocks. Major brokers provide access to a wide range of markets and competitive leverage ratios.
This is a brief recap of the environment created by the major Regulatory Authorities in the UAE:
The Dubai Financial Services Authority (DFSA) regulates financial services within the Dubai International Financial Centre (DIFC). It ensures that firms operate with integrity and transparency, providing robust protection for investors.
Securities and Commodities Authority (SCA) oversees the broader UAE financial markets, ensuring that market participants comply with regulations designed to maintain fair and efficient markets.
Abu Dhabi Global Market (ADGM) is a financial free zone in Abu Dhabi, regulated by the Financial Services Regulatory Authority (FSRA). It provides a well-regulated environment for financial services firms, including those offering CFDs.
Regulations by DFSA, SCA, and ADGM aim to protect investors through stringent requirements on brokers, including capital adequacy, transparency, and conduct of business.
There are limits on leverage ratios to mitigate risk. For instance, the SCA has set maximum leverage levels for different asset classes to protect retail investors from excessive risk.
Brokers must adhere to rigorous reporting standards, ensuring transparency and compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
In essence, trading CFDs in the UAE offers significant opportunities due to the the robust regulatory framework provided by DFSA, SCA, and ADGM, which helps mitigate some risks, offering investor protection and market integrity.
As always, traders should carefully consider their risk tolerance and investment goals when choosing between CFDs and traditional stock trading, taking into account the unique characteristics and regulatory environments of each option. – Roberto D’Ambrosio, CEO Axiory Global
