CFD vs Stock Trading – Which one are Best

CFD vs Stock Trading – Which one are Best

Written by Sophie Robertson, In Blockchain, Finance, Published On
September 7, 2022
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Difference between CFD and share trading

The key fact which differentiates trading contracts for difference and share trading is trading CFD is essentially speculating on a market’s price and not owning the underlying asset. While if you trade shares you also own the underlying stock trading. Now let’s dig a little deeper and try to understand how exactly CFD trading is different from share trading.

Leverage and Margin

When you trade CFDs, leverage and margin work simultaneously. With leverage, you can gain exposure to an underlying asset by investing only a small amount of capital to purchase and own the asset. Margin is different from a fee–it is the minimum capital that you should be having so you can open a bigger position on the basis of the size of the contract and the underlying asset you wish to trade. The initial margin required refers to the percentage of the contract value. This value is calculated on the basis of the pre-set leverage for the asset class. Trading on margin could be a risky business.

Trading on an investment trading platform implies that you purchase the shares without leverage applied to the capital you have at hand and you should be having the entire value of an asset available.

Assets

You should be able to trade on a number of different assets including Shares, Forex, Commodities, Indices, Cryptocurrencies, ETFs, and Options on a CFD platform. This offers an opportunity to diversify your portfolio and also get the hang of how the world’s leading exchanges operate.

The Investment trading platform is a platform where you can trade stocks and exchange-traded funds (ETFs). You are able to gain access to over 1200 stocks and 90 ETFs, which gives you plenty of options to purchase and hold shares from your preferred firms or any listed ETF on the platform. You also get a chance to make the most of the latest IPOs when companies go public.

Going Short

Contrary to the Invest trading platform, where you need to own the asset before you can sell it CFDs let you open a sell position at a particular price, hoping that it can be closed at a lower price, so profit can be made from a fall in the instrument’s price.

Asset Ownership

You can be exposed to an underlying asset with the help of a CFD without having to take ownership of it. You would earn profit or incur losses on the basis of any price movements in the underlying asset. The ultimate goal of CFD trading is to predict the price movements of an underlying asset. Whether you make a profit or a loss relies on position size and price movements.

On the other hand, when you purchase a stock on the Invest trading platform, you take ownership of the physical asset and expect a significant increase in the asset’s value in the long term before selling it.

CFD vs. Stock – Which is Better for Active Trading?

CFDs are considered risky investments that are better for veteran investors who have a sound knowledge of the market. CFDs offer far greater opportunities for active trading than stocks as there is a possibility of earning more in the short term if the investment has been made wisely.

If you’re new to the market and to active trading, consider beginning with CFDs with relatively lower leverage to earn profit. Another option is to opt for stocks that you think are likely to bring great results in the short term.

CFD vs. Stock – Which is Better for Investing?

As a long-term investment, stocks have typically performed better than stock CFDs. Since the two are very different, stocks are better suited for long-term investment since there is low leverage and no rollover costs.

Additionally, stocks are comparatively safer and since the stock market is regulated by a central authority, investors’ interest is safeguarded. Hence you may even consider placing big bets with the capital. However, diversification of shares is the best way to cut down risks.

Is CFD cheaper than share trading?

With CFD trading, you only have to pay a small initial amount upfront instead of the entire value of your trade. This initial sum is known as margin, through which you are able to access a better position in the stock market with much less capital. When you purchase a physical share you have to pay the entire sum required upfront. But make no mistake as this doesn’t imply that there is any difference in your total exposure with either method. Remember that leverage can amplify both your profit and loss. The costs linked to CFDs and share trading are different. When you trade CFDs, you don’t have to pay any commission; you just need to pay for the spread along with any associated overnight fees. But in the case of shares, your broker may charge you some commission that you must be aware of in advance. Additionally, you would also have to pay the stamp duty on the security.

Can you use CFDs to hedge your existing share portfolio?

CFDs offer a great insurance opportunity to safeguard your current portfolio since you can sell short, predicting a price downtrend. Let’s assume that your existing portfolio has blue-chip shares which you want to hold onto in the long run. However, in case the market is about to go through a downtrend which is turning into a matter of concern for you, leveraged trading can help you hedge against this risk by helping you short-sell. In case the market dips, whatever you lose could be offset by the gain from your short hedge with the help of CFDs. If the market registers an increase, you may lose on your hedge but earn on your portfolio.

Parting words

Here’s hoping that if you’ve reached the end of this article, you now understand the key differences between CFD vs stock trading in a better way. The pros and cons of stock CFDs, when you compare them to buying shares, are something that traders should always take into account.

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