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CFD shares vs Fractional shares in Nigeria

CFD Shares vs Fractional Shares in Nigeria review

 

Shares trading has become a very popular investment method in Nigeria today. As such, there are a variety of different instruments with which Nigerian traders can invest in the stock market that don’t involve buying actual shares.

Today, we look at two such examples, namely CFD and fractional shares, and explore the benefits of both investment instruments for Nigerian traders.

 

CFD shares vs Fractional shares in Nigeria Revealed (2022):

 

 

A closer look at Contracts for Difference (CFDs)

 

In the field of financial derivatives, a contract for differences (CFD) is an agreement in which the spread between the opening and closing prices of trade is settled in cash. With CFDs, you are not guaranteed to receive any certain stock or product.

Trade aficionados will find that contracts for differences are a useful tool.

The price movement of securities and derivatives can be traded in using CFDs. Put simply, derivatives are financial investments that are derived from some underlying asset. So, traders and investors use CFDs to speculate on the price movement of the underlying asset or security.

Speculative Contracts for Difference (CFD) traders can wager on the price going either up or down. CFDs are traded in the same way as stocks, with buyers anticipating a rise in price and sellers anticipating a fall in price.

If the price of the underlying asset goes up after a buyer of CFD purchases it, they may decide to sell, and to make this decision, the difference between the buy and sell prices is calculated. The brokerage account is where the investor’s gain or loss from trading is finalized.

When one anticipates a drop in the value of a security, one opens a sell position. They need to buy an offsetting transaction in order to close the position. Once again, the gain or loss is netted and settled in cash through their account.

 

Trading CFDs in Nigeria

 

All sorts of assets and securities, including ETFs, can be traded using contracts for differences (ETFs). Commodity futures contracts, such as those for crude oil and corn, will also be used by Nigerian traders to speculate on price movements.

Futures contracts are standardized contracts that bind parties to the purchase or sale of an asset at a specified price at a specified date in the future.

Contrary to popular belief, CFDs are not futures contracts but rather allow investors to trade the price movements of futures. Contracts for difference (CFDs) trade like other securities, with buy and sell prices and no expiration dates tied to fixed prices.

Contracts for difference (CFDs) trade OTC through a group of brokers who coordinate supply and demand to set prices. Put another way, contracts for difference (CFDs) are not traded on major exchanges like the New York Stock Exchange (NYSE).

A contract for difference (CFD) is a tradable agreement between a client and broker in which the parties exchange the difference between the opening and closing prices of a trade.

 

A closer look at fractional shares

 

A fractional share is a share of equity that is worth less than one whole share. Such shares could be the final result of a stock split, a DRIP, or any other business action.

Although investors would benefit from owning fractional shares, doing so is typically not possible due to the stock market’s lack of availability.

Many methods, such as stock splits, mergers, and acquisitions, can result in the creation of fractional shares.

 

Fractional shares through mergers and acquisitions

 

In the event of a merger or acquisition, a company may issue a fractional share since the new common stock is often combined by a fixed ratio. Shareholders may be left with a fraction of a share due to the ratio.

In order to sell customers smaller amounts of stock, certain brokerages may deliberately split complete shares. Typically, this sort of share split occurs with large stocks like Amazon.

 

Fractional shares through stock splits

 

In some cases, the number of shares remaining after a stock split will be divisible by 2. Investors who own an odd number of shares would wind up with a fraction of a share following a 3-for-2 stock split because they would receive three shares for every two shares they own.

 

Fractional shares through dividend reinvestment plans

 

Those Nigerian traders who participate in dividend reinvestment plans (DRIP) may wind up with a mix of whole and fractional shares. Dividend reinvestment plans allow Nigerian shareholders to reinvest their dividend payments into further shares of the same company or fund.

This is not restricted to whole shares because the money trickles back into buying additional stock. The acquisition of a fractional share may also occur as a result of reinvesting capital gain distributions or participating in a dollar-cost-averaging program.

 

Trading fractional shares in Nigeria

 

Only through a major brokerage in Nigeria can fractional shares be combined with other fractional shares to form a full share for sale. Selling the fractional shares could take longer than expected if there is little market demand for the selling stock.

Some investors in Nigeria may not be interested in keeping fractional shares after acquiring them unintentionally due to events like stock splits.

They may be able to find a brokerage business ready to take the fractional share if the stock in question is in high demand. They could also try to identify a brokerage in Nigeria business that would be willing to sell another half share.

 

Benefits of trading CFDs in Nigeria

 

Contracts for difference (CFDs) allow investors in Nigeria to participate in the ups and downs of the underlying security market without actually purchasing the security or taking delivery of the underlying asset.

The ability to borrow funds from one’s broker in order to increase one’s leverage or the size of one’s position in order to magnify gains is what makes CFD trading possible on margin. Before approving this kind of trade, brokers in Nigeria will need traders to keep a minimum balance in their accounts.

In most cases, the leverage offered by CFDs is greater than that offered by more conventional trading methods.

Unlike traditional exchanges, the CFD market is typically subject to fewer restrictions. Therefore, the amount of money you need to open a brokerage account for CFDs may be less.

For most brokers in Nigeria, the minimum deposit required to open an account is $1,000. In addition, a trader’s return on investment can be bolstered by cash dividends paid out on CFDs, as these instruments are a reflection of actual company actions.

The majority of CFD brokers have products available in every significant market. Traders can access all available markets using their broker’s interface.

Finally, a trader in Nigeria using CFDs can open a long or short position, as well as a buy and sell position, with minimal effort. In most cases, short-selling is permitted in the CFD market. It is possible to short an instrument at any time.

There are no borrowing or shorting fees because no underlying asset is really owned. In addition, trading a CFD typically incurs negligible to zero expenses.

The spread is the difference between the ask and the bid prices that the broker earns from every trade. Brokers get a commission off the difference between the ask and the bid prices they quote.

 

Benefits of trading fractional shares in Nigeria

 

The ability to invest in less than a whole share at once is referred to as “fractional share investing.” When share prices are too high for a potential investor, this can be a helpful option. This facilitates exact monetary investments by shareholders in a corporation.

You don’t have to wait until you can afford to acquire a whole share of the stock to make an investment in a firm with a high stock price. Getting started doesn’t require a large sum of money.

You can only purchase a stock or ETF in increments equal to the share price if the market does not permit fractional share investing. Instead of having to acquire complete shares, you can buy fractional shares and invest exactly the amount that you wish to invest.

Finally, for exact asset allocation, it can be challenging to acquire exclusively in whole share increments from a variety of companies in Nigeria. The ability to invest in multiple businesses with a single dollar amount is made possible by fractional shares.

 

Conclusion

 

Both fractional shares and CFDs are a form of trading that does not entail owning the full asset which you are trading. The primary difference is that with CFD trading, you are speculating on the underlying price of the asset, while with fractional shares you only own a portion of the share value.

Both CFDs and fractional shares have distinct advantages for traders in Nigeria. However, CFDs are typically easier to trade, access, and resell on the markets.

Therefore, most traders in Nigeria would do best by starting with CFD share trading and then exploring fractional shares at a time when their portfolio allows them to invest in share values that they may not be able to sell so quickly.

 

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You might also like: Shares Certificates explained for Nigeria

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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