Most traders face this dilemma of online trading; whether to trade shares or explore alternatives like CFDs. Both methods have advantages and disadvantages when it comes to participating in the financial markets. Those participants involved with share CFDs trading should understand how they are different from traditional stock investing. Here is the comparison of CFDs trading and investing in stocks.
CFDs trading or stocks, the first distinction has to do with ownership. When you buy shares, you are really acquiring fractional ownership of a corporation. Share ownership can bring a few perks, such as the ability to receive dividends and vote during shareholder voting. On the other hand, there is no actual ownership of any share when trading share CFDs. You would be, in a sense, entering into a contract with a broker who replicates the price movement of the stock. This means, with CFDs, you can speculate about the price going either up or down without owning that stock.
This puts forth another distinction because of ownership: the ability to trade in both directions. The profit on stocks may only be realized on price appreciation. You buy shares, hold them, and sell when they appreciate. With CFDs, particularly with share CFDs, the trader has the flexibility to go long (buy) or short (sell). For instance, if one believes that a particular stock would drop on pricing, one can take a short position to gain from the drop. This means you can trade both ways rising and falling with CFDs, which makes it one of the most glorious benefits of all prospects in profit-taking during varying market conditions.
Another area of difference between trading in CFDs contracts for difference products, and investing in stocks is that of leverage. Through a leverage facility, one is enabled to trade his capital into a larger position than was possible with the amount of initial investment usually offered to clients by brokers. For example, using 10:1 leverage, a trader is capable of controlling a position worth ten times his deposit amount. While leverage can increase profit potential, it also magnifies losses, making it a double edged sword. Stock investment carries no leverage, since most of the time, including owning shares has to be backed up by capital in full to purchase the shares outright. In terms of exposure risk, stock investment is much less risky, but that exposure risk does not have that upside-like leverage for major profit potential.
CFDs win in the game when it comes to trading flexibility as against stocks. When you are trading stocks, you’ll only be able to buy and sell shares within hours that are defined in the stock markets. This is in contrast with CFDs in the sense that these are available 24 hours with many brokers providing extended access to markets all over the globe. This kind of trading benefit mostly applies to share CFDs. It allows traders to react to news events and price movements anytime, even when normal market hours have closed.
Finally, the cost of the transaction is another thing you may consider while comparing stocks and CFDs. A stock investor pays a certain commission fee to the broker when buying or selling a share, while CFDs usually come with different pricing mechanisms. For example, for most brokers, they are just available as spreads-the difference between the buying and selling price of the asset. In some cases, overnight financing costs may also apply to the situation when you hold a position long enough. These costs can easily add up, especially if you are holding a certain position for a long time. Thus, it’s important to think of these in your whole trading strategy.
Arguably, the major differences that separate CFDs trading from trading stocks are ownership, trading flexibility, the amount of leverage offered, and transaction costs. On the other hand, CFD trading would give an investor the flexibility to speculate on price movements in either direction without owning the underlying asset, whereas stock investing gives ownership of an asset net dividends and voting rights. Share CFDs trading could become an excellent tool for traders wanting to take advantage of the changing environment. Featuring the leverage and the fact that trading is nonstop, it allows for 24/7 trading. Risk, however, must be understood as well as solid risk management practices implemented.
