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28 April @ 09:44

What are CFD Stocks and Share Trading?

A trader can invest in shares in two ways. One method is to buy genuine shares in companies listed on different exchanges; this is called share trading. For example, you can buy Apple stock on the NASDAQ and own a piece of the corporation.

Buying shares is an option, but so is Trading CFDs. A trader can trade a contract for difference (CFD) on a stock without physically owning it.

A CFD is a derivative instrument where a broker offers to pay an investor the difference between an opening and closing price of a security. Traders can open long (upward) or short (downward) positions (speculating that the price will fall).

Traditional share trading is a long-term investment strategy where traders expect prices to climb over months or years. While CFD trading is a day-to-week investment, where deals are opened and cancelled within 24 hours.

CFD vs Stock Trading: Key differences

The main distinction between CFD and stock trading is that with a CFD you do not own the underlying stock. Its price fluctuation is all you need to trade it. CFDs allow you to profit from an asset's upward or downward movement.

The capacity to make leveraged trades is another important distinction between buying an asset and buying a CFD. CFDs are traded on margin, allowing traders to build greater positions than their original capital allows.

Exploring the advantages of CFD trading over stock trading reveals that both types may be used to profit from market price swings, and both can be included in your portfolio. Examine the table below and decide which is ideal for you right now.

Is trading CFDs cheaper than trading stocks?

Due to the low initial margin required for CFD trading, you can obtain a position of equal size in the stock market for less money. When you buy a physical share, you pay the entire asset's cost upfront. However, your overall exposure is the same. Note that leverage can increase earnings but also losses.

Can I use CFDs to hedge my stock portfolio?

Because you may sell short and bet on a price decline, CFDs are a great way to hedge your existing portfolio. Assume you already own a portfolio of blue-chip shares. You want to hold them for the long term, but you fear a market correction may negatively impact your portfolio's value. With leveraged trading, you can short-sell this market to protect yourself. If the market falls, the gain from your short hedge utilising CFDs can balance the loss on the portfolio. If the market rises, your hedge loses but your portfolio gains.

Suggested read: How to trade forex CFDs?

Final note: Why CFD?

Leverage
The main appeal of CFDs is the ability to trade on margin or leveraged trading. When trading on margin, you simply need to put down a part of the original investment and borrow the rest from your broker. Leverage allows for larger exposure with less capital, opening up worldwide markets.

Speculation
People trade CFDs to profit from short-term price changes. Swing trading occurs in both bullish and bearish markets. To trade CFDs, you don't require extensive market research. The tough thing is that it's not always easy to pinpoint when a price change ends.

Short selling
One of the main advantages of CFDs over long-term stock shares is short selling. Contracts for difference allow you to profit from both rising and declining markets. You can profit from a stock's price drop by opening a short trade. It makes CFDs more flexible than traditional share trading.

Greater market access
Contracts for difference provide unrestricted access to financial markets that traditional share trading may not reach (e.g. emerging or foreign markets). With CFDs, traders may trade the world's most popular equities, commodities, indices, currency pairs, and even cryptocurrencies all on one platform here at Invelso.com, saving money and time.