Are you looking to get into the stock market but need to know which route to go? Are you overwhelmed by the prospect of deciding between trading shares or Contracts for Difference (CFDs)? Don’t worry – this article is here to help. We’ll deeply dive into what CFD trading and share trading are, comparing the two options. This way, you can make an informed decision about which method works best for your investment portfolio.
Read on to learn more about the advantages and disadvantages of each form of stock market investing so that you can choose wisely.
What is CFD trading, and how does it work
CFD trading is a revolutionary way of taking advantageof global markets without owning the underlying asset. By entering into contracts, CFD traders can take advantage of the highly dynamic nature of investments such as commodities, indices, stocks and forex without paying the total purchase price. Because CFDs are traded over the counter, they provide access to markets that are usually hard to reach.
Furthermore, CFD traders can avoid paying additional fees due to the lack of an exchange or intermediary party. Instead, returns and losses rely on margin levels and changes in the underlying asset value — vastly increasing the amount of money gainable from making a trade. It makes it a desirable prospect for investors looking to make their fortune in today’s economy.
The benefits of CFD trading over share trading
One of the significant benefits of CFD trading is its flexibility. By allowing traders to take a long or short position on a particular asset, CFD trading provides an avenue for finding opportunities regardless of the underlying market direction. If you believe a specific stock will fall in value, you can sell it before it drops and then buy back later at a lower price — pocketing the difference as your earnings.
CFD trading also offers greater leverage than direct share trading due to margin requirements being much lower. An investor only needs to put up a fraction of the total value of their contract — resulting in potentially higher returns even with smaller investments. In addition, fees are much lower since there’s no need to pay an exchange or intermediary.
The drawbacks of CFD trading versus share trading
Although there are many great features of CFD trading, it is not without its disadvantages. Due to the high degree of leverage and potential for significant losses, investors need to be very confident in their predictions about market direction. Otherwise, even small changes could lead to devastating losses against the balance sheet. Plus, CFDs don’t provide ownership rights, meaning you cannot directly benefit from dividends or capital gains associated with owning shares.
In comparison, share trading gives investors direct ownership over stocks and shares that can result in significant returns through dividends and price appreciation over time. It can also yield tax advantages depending on where you live, and the type of asset being traded. Furthermore, share trading is generally considered a less …