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CFDs vs. Stocks

CFDs vs. Stocks

CFD

First, when trading stocks, you own a piece of a business. Owning a stock is not the case with CFDs. Because stocks trade publicly, they’re subject to a market’s trading hours. CFDs, however, don’t require ownership and are therefore accessible 24 hours a day, five days a week.

What are CFDs?

You are aware that you’re essentially buying a share of a business when you invest in stocks. A contract for difference, however, is slightly different in the way it operates. A contract for difference (CFD) is between a buyer and seller where the buyer agrees to pay the seller the difference between the opening and closing value of an item. In addition, CFDs are considered riskier. Note that CFD trading comes with leverage, and margin trading can significantly increase your profits, but also increase your potential loss. According to some studies, 67 to 76 percent of retail investors eventually lose money when trading CFDs.

What are the differences in characteristics?

First, when trading stocks, you own a piece of a business. Owning a stock is not the case with CFDs. Because stocks trade publicly, they’re subject to a market’s trading hours. CFDs, however, don’t require ownership and are therefore accessible 24 hours a day, five days a week.

The most crucial difference is that CFD trading is with leverage and stock trading is not. When trading with leverage, there is the possibility that the losses can exceed the initial investment amount.

Why should I trade CFDs?

While CFD trading imposes significant risk on your money, there are also advantages. Perhaps the most crucial factor to mention is the leverage you’re using. Leverage usually has a negative connotation since it is often associated with high risk and significant losses. However, leverage can be potentially rewarding and can offer investors and traders the ability to enter substantial positions without paying the total amount. In addition, CFD trading allows the investor to go either long or short, like stocks. It is important to note is that while regular stocks are limited in terms of trading hours, CFDs can be traded 24-hours per day, increasing the overall accessibility of the market.

 

The amount you’ll be spending depends on the spread, overnight funding charges, and occasional commission in terms of costs. For example, stock trading costs often include the stock exchange’s spread, custody fees, and occasionally a commission, but never an overnight funding fee.

Depending on your specific wishes, the expected holding duration for the trade is the most significant cost consideration. Traders consider stock trading the superior option when the trader intends to hold the position for an extended period. On the contrary, CFD trading is a popular option for fast-paced trading.

 

Because CFD trading is a leveraged commodity, it takes less capital upfront than stock trading. You use less capital because when you purchase a share, you pay the entire cost of the asset upfront. When trading CFDs, on the other hand, you’ll will need you to put up a percentage, known as a margin, which means you can acquire a position of equal size for less money. However, keep in mind that your total exposure would be the same with either, so while leverage can magnify gains, it can also magnify losses and exceed your original investment.

So, what’s the case for share trading?

Brokers often impose certain costs on individuals active in the CFD trading space. Naturally, if you bought shares with your own money, you would not be subject to this charge. However, if you want to acquire shares to hold for an extended period, purchasing stock CFDs will cost you a lot of money. In addition, you must always be aware that you should have sufficient funds in your account to cover your margins. Not being up to date with your margins can cause brokers to close your position automatically.

 

While there are distinct differences between stock and CFD trading, the differences are not enough to say that one is better than the other. Ultimately, it would be best if you made a choice depending on your personal preferences, goals, and risk tolerance.

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