When you’re looking to start trading, you first need to decide what kind of trader you want to be. Do you want to trade CFDs or stocks? Each has its advantages and disadvantages, so it’s essential to understand the differences before deciding. We’ll look at the pros/cons of CFD vs stock trading.
What is CFD trading?
A CFD, or contract for difference, is a derivative product that allows you to speculate on the price movement of an underlying asset. You don’t own the asset, but you can still profit (or lose) money based on its price movements. CFDs are traded on margin, which means you only need to put down a small deposit to open a position. It makes CFDs a high-leverage product, which can magnify your profits – but also your losses.
What is stock trading?
When you trade stocks, you buy and sell publicly-listed companies’ shares. You become a partial owner of the company, and your goal is to sell your shares for more than you paid for them. Unlike CFDs, stocks are not traded on margin, so you’ll need to have the total value of the shares in your account before you can trade.
What are the advantages of CFD trading?
A significant advantage of CFD trading is that it’s a highly leveraged product, which means you can control a prominent position with relatively little money. For example, if you want to trade $10,000 worth of gold, you would only need to put down $100 if you’re using 10:1 leverage. This high degree of leverage can magnify your profits – but it can also amplify your losses.
Another advantage of CFD trading is that you can go short and long, which means you can profit from a plummeting market and a rising one. With stock trading, you can only profit from a rising market, as you can only sell shares you already own.
What are the disadvantages of CFD trading?
The most significant disadvantage of CFD trading is that it’s a highly leveraged product, which means that your losses can also be magnified. For example, if the cost of gold falls by 10%, you would lose $1,000 on your $10,000 position – but if it falls by 50%, you will lose your entire $100 deposit.
CFDs are also complex financial products, and it’s essential to understand how they work before you trade. You could quickly lose money if you don’t know what you’re doing.
What are the advantages of stock trading?
One of the most significant advantages of stock trading is that you can buy shares in companies you believe in and have a vested interest in their success. When you own shares, you become a partial company owner and have a say in how it’s run; read more here. You also benefit from any dividends that the company pays out to shareholders.
Another advantage of stock trading is that it’s not a leveraged product, and your losses are limited to the amount of money you have invested. With CFDs, your losses can be much greater than your initial investment.
What are the disadvantages of stock trading?
The main disadvantage of stock trading is that you can only profit from a rising market; if the market falls, you will lose money. It is in contrast to CFD trading, where you can profit from rising and falling markets.
Another disadvantage of stock trading is that it can take longer to see profits than other types of trading. It is because you must wait for the share price to rise before you can sell your shares and make a profit.
So, which is better – CFD or stock trading?
The answer to this question depends on your circumstances and goals. If you’re looking for quick profits, CFD trading may be a better option. However, stock trading may be the better choice if you’re looking to invest in companies you believe in. Whichever type of trading you choose, ensure you understand the risks before starting trading.
