Since there continues to be a growing debate on what’s the difference between trading shares as compared to trading CFDs (Contracts for Difference), we would like to provide some brief clarifications on the matter. We would like you to know that each type of instrument comes with both positives and negatives, so without further ado, let’s see what you get when trading each of them.
The difference between shares and CFD trading
Traders should understand that the main difference between trading shares and CFDs is that when you trade CFDs, you speculate on a market’s price without taking ownership of the underlying asset. On the other hand, trading shares means to need to take ownership of the underlying stocks.
Second of all, trading CFDs involves using leverage, meaning you’ll need to put only a fraction of the full trade value (a.k.a. the margin) to gain full exposure. Leverage has the effect of amplifying profits or losses (that can exceed deposits) while trading physical shares means you’ll have to pay the full cost (or get a small linked margin loan), with limited contribution from your broker. If you want to dig deeper into the subject, you can learn more about trading CFD shares here.
Key things to consider
What traders should know is that CFDs make it accessible to trade popular stocks in markets like the United States, Germany, and the UK, where stocks are expensive as compared to other sides of the world. They can get involved and profit from the rising and falling of some of the most popular companies like Google, Apple, Boeing, Intel, Walmart, and others.
On the other hand, leverage must be used in a responsible way. Shares are volatile instruments that sometimes can move 10-20% in a single day, which makes risk management and diversification two important tools that must be used in combination with decent leverage.
Also, no matter the leverage level, traders should always open trading orders in such a way that they’ll have enough available margin. That will help them offset unexpected market moves without severely damaging their accounts.
Neither stocks or CFDs are better, each of them carrying several strong and weak points. Some professional traders choose to work with both, in order to diversify their holding across several different asset types. CFDs are highly efficient especially when it comes to short-term trading, while stock trading allows profiting from long-term market moves.
