CFDs vs. Stock: Which is Better for You to Trade?
January 20, 2022 (Investorideas.com Newswire) Would you rather trade long-term or short-term? This is a question that traders need to answer before they can start formulating success strategies. To aid investors in this decision-making process, let's take a look at some key elements of contract for difference (CFD) and stock trading.
The difference between CFDs and Stocks
Ownership and leverage
The first major difference is ownership. You take complete ownership of shares when you buy a stock. In effect, buying stock is like buying a small part of the company that you believe in. In terms of leverage, you pay the full price of the share you have bought.
On the other hand, CFD doesn't grant ownership in the stock. It is an online trading mechanism based on speculations of a price of a security in the future. The trader doesn't own the underlying asset, but rather trades on its value. In terms of leverage, CFDs allow investors with small capital to enter a trade.
Short-term and long-term
From the ownership, it is clear that CFD is more ideal for the long-term while stock can be traded on a short-term basis. But even so, traders must be aware of the details of their investment portfolio before going long or short.
Advantages of CFDs vs Stock
The top reason why CFDs are more popular than stock trading these days is the availability of leverage. Basically, leverage allows traders to enter large positions even when they don't have the capital to do so. It is an exposure to greater rewards and risks in equal measure.
Access to many markets
CFD trading can potentially access to various asset classes, not just stocks, such as forex, indices, commodities, IPOs, cryptocurrencies and others. Therefore, it allows traders to have a wider pool of assets from which they can contract to buy or sell, thus enabling a much more diverse portfolio.
The CFD market is open 24 hours on trading days. It is more accessible to international investors who want to take advantage of foreign stocks. On the other hand, the stock market is only open during working hours of the relevant stock market exchange, which is quite limiting for international investors.
Is CFD trading risky?
Leverage is a key determinant of how risky CFD trading is perceived to be. Remember, leverage allows a trader to enter a large trading position even when they don't have the money. This benefit is also a drawback if things don't go well.
A good example is when you deposit 5% collateral, you can lose your investment if the share price falls by 5%. So, while leverage increases the potential for a great reward, it also increases the risk.
So, is it better to go long or short? Well, the decision lies in the investor's hands. Both approaches have their pros and cons. The final decision should be made based on what the investor wants to achieve.
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