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CFD Trading Vs Stock Trading – Which One Is Right for You?

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Before trying to understand the differences between CFD trading and stock trading you need to hear one basic truth in virtually any type of investment. There is always going to be some amount of risk because no one has a crystal ball. Therefore, it is highly unrealistic to believe you can predict what tomorrow might yield with 100% accuracy. That’s the truth. Now, with that said, when it comes to CFD trading vs stock trading, you can learn the differences between the two which should give you a fairly solid idea of which financial product is better suited to your style of trading. Let’s look at that a little closer.

 

The Main Difference Between CFDs and Stocks

At this point, there is probably little need to define what stocks are all about. We all know that when you buy stocks you are buying a portion of that company. The more stocks you own, the larger portion of the company you own. Along with that comes voting power. The person or entity that owns the majority of stocks has the greatest voting power when it comes to anything requiring a vote. Yes, that’s extremely basic, but that’s the gist of what a stock will do for you.

Now then, when it comes to CFDs, Contracts for Difference, you will not be buying a portion of a company but rather you are speculating on whether or not the underlying stock is going to gain or lose in value. That’s as basic as it comes in defining what a CFD is. You are literally ‘betting’ or ‘speculating’ on what the selling price (value) of that stock will be at a specific point in time. But here’s the good part. You only need to invest a margin, or in laymen’s terms, a fraction of what a stock is worth. 

 

Substantial Difference in Gains and Losses

Therefore, if a stock sells for $100 you may only be required to invest $10 on each stock which means you can enter the market with a whole lot less money. Again, very basic, but understandable. However, it also means that if you’ve speculated correctly on that stock going up or down in value, you will gain much less than if you bought the stock low and sold it high. Unfortunately, that’s the easiest way to explain the difference and it really is more complicated than that. What you need to remember here is that you will need to learn key indicators in the market of the underlying stock to determine whether or not to go long (buy) or short (sell). In reality, that’s similar to stocks in that when you buy them low and wait it out until they gain in value before you sell, aren’t you doing much the same thing? The main difference is actually in the amount of money required to enter the market.

 

Which Is Right for You?

There are two things you should consider here. When you invest in CFDs you can start with a fraction of the amount you would need to buy into the stock market, but you can end up losing more than you invested. In the stock market you can only lose what you’ve paid to purchase those stocks. With CFDs, if you speculate on the wrong side of going long or short, you could lose money on what the difference would have been had it been in your favour. It’s a bit complicated, but for most new investors, it is suggested that you take the time to learn various trading styles in CFDs first because although the gains are lower, they can be netted much more frequently, and you only need to start with a fraction of the cost of the underlying stock. For most new investors with less money to invest, CFDs are the better choice if they are willing to learn the market.

Rachel Adams

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