Is there a difference between CFD and stock trading?

Regarding trading, there are two main types of strategies: those who trade CFDs and those who trade stocks. Both have pros/cons, but which is best for you? We’ll look at the differences between CFD and stock trading so that you can make an informed decision about which type of trading is right for you.

What is CFD trading?

CFD, or Contract for Difference, is a derivative trading type. Instead of buying and selling actual shares, you’re buying and selling contracts representing those shares. CFDs are traded on margin, meaning you only need to put down a small deposit (known as a margin) to open a position.

It could be attractive for traders who want to make more enormous profits from their trades than they would be able to if they were buying actual shares. However, it also means that losses can quickly mount up if the market moves against you.

What is stock trading?

Stock trading is the more traditional form of investment and involves buying and selling actual company shares. Unlike CFDs, stocks can’t be traded on margin, meaning you’ll need to have the total amount of the shares you’re buying available in your account. It can make stock trading less risky than CFD trading, as you can’t lose more than you’ve invested.

However, it also means that profits are often smaller, as you can only profit from the increase in the worth of the shares you own.

Stock trading is often seen as a long-term investment, as it can take time for shares to increase in value. Many people who invest in stocks do so, intending to hold onto their shares for years or even decades.

Main differences between CFD and stock trading

The main difference between CFD and stock trading is that CFDs are traded on margin, while stocks can’t be. CFD trading can be riskier than stock trading, as you can lose more money than you’ve invested if the market moves against you. However, it also means that profits can be much larger, as you only need to put down a minimal deposit to open a position.

Another difference between CFD and stock trading is that CFDs can be used to short sell, which isn’t possible with stocks. Short selling is when you vend security you don’t own in the hope of repurchasing it at a lower price so that you can profit from the difference. 

The benefits of each type of trading

CFD trading has many benefits that make it attractive to traders. 

The main benefit is that you can trade on margin, meaning you only need to put down a minimal deposit to open a position. It could be helpful if you’re looking to make more enormous profits from your trades than you would be able to if you were buying actual shares. CFD trading is also flexible, as you can go long or short and use leverage to magnify your returns.

The benefits of stock trading include that it’s seen as a more traditional form of investment, and it can be less risky than CFD trading as you can’t lose more money than you’ve invested.

The risks associated with each type of trading

CFD trading is riskier than stock trading as you can lose more money than you’ve invested if the market moves against you. However, it also means that profits can be much larger, as you only need to put down a minimal deposit to open a position.

Short selling CFDs can also be a helpful way to make money in a falling market, but it’s also precarious, as you could lose a lot of money if the market doesn’t fall as expected.

On the other hand, you can trade CFDs on many assets and not necessarily stocks. This means when the economy is not doing well, you can flock to trade safe haven assets such as gold, and when company stocks dip, there is not necessarily a cause for concern for CFD traders either.

How to start trading

If you’re interested in starting to trade, you’ll need to open an account with a broker; see it here. Make sure to shop around and compare brokers to find one that offers the best terms for the type of trading you’re interested in.

You’ll also need to deposit money into your account before you can start trading. The amount you need to deposit will depend on the broker you’re using but is typically between $100 and $500.

You can start trading CFDs or stocks when you’ve deposited money into your account. If you’re new to trading, it’s a good idea to start with a small amount of money to learn how the markets work without risking too much capital.