If you are new to financial investing online, it’s important not to be too hasty in signing up to the first trading platform that you come across. That’s because financial brokers offer a variety of trading options, some of which may not be best suited to the way you wish to trade.
The most common financial trading option is share trading, followed by CFD trading. However, there are several key differences between share traders and CFD traders, which this article will explore in greater detail to help you make the right trading choice when starting small and looking to win big.
CFDs stand for contracts for difference. It’s important to note that a CFD is not the same as a share in a listed company. A CFD is a financial derivative that allows investors to speculate on the price of an asset in the underlying (real) market.
Crucially, when you play a buy order for a CFD, you never physically own the asset itself; you are simply trading on the price movement within the underlying market.
Although CFD traders never own the instruments or assets they choose to trade, they can still make similar profits and losses to share traders when the market moves in their favour and against them.
The pros of CFD trading
- Access to a broad spectrum of stocks, forex and commodities markets
The best CFD trading platforms provide traders with direct access to thousands of single stocks, index trackers, forex pairs, government bonds, commodities, cryptocurrencies and more.
CFDs are a leveraged product. This means that traders can deposit only a small percentage of the overall value of their trade to open a position. This allows traders to maximise profits, but it can also exacerbate losses without proper risk management.
- Native mobile apps to trade on the move
CFD trading platforms also offer fast and reliable access to the markets from smartphones and tablets via native apps.
- Ability to go short to take advantage of falling prices
Share traders can only go long on a stock to take advantage of rising prices. CFDs allow investors to profit even when the value of a stock is falling by ‘shorting’ the stock.
- Free from Stamp Duty
As all CFDs are derivative products and never allow you to own a physical asset, there is no Stamp Duty to pay on profits made from buying and selling CFDs.
The cons of CFD trading
- Excessive use of leverage can expose traders to serious losses
As we’ve already touched upon, leverage can be hugely beneficial in profitable situations, but it can also wipe out your full bankroll and more if you don’t set tight stop-losses.
- All too easy for beginners to overtrade
The ease of accessibility to CFD trading platforms means that some trading beginners will find the temptation of placing buy and sell orders all too much, resulting in overtrading and losing control of open positions in the market. To offset this, certain CFD providers will provide in-depth guides and advice to help newbies.
- Financing fees
If you wish to leave a CFD position open overnight or during the weekend shutdown, CFD brokers normally charge financing fees, covering the interest they pay to keep your position open.
Of course, whether you opt for CFD trading or share trading, all forms of financial investing carry an element of risk. Therefore, it’s always a good idea to use platforms that offer free demo accounts to allow you to get a feel for their software first before making real-money deposits.