TRADING CFDS ON SHARES
The primary distinction between trading contracts for difference and share trading is that when you trade a CFD, you speculate on the price of a market without owning the underlying asset. In contrast, when you buy shares, you must own the underlying equities.
CFDs are also traded on leverage, which means you only need to put up a fraction of the total value of the trade - the margin – to receive full exposure. Profits will be amplified as a result, but losses may outweigh deposits. On the other hand, when you trade shares, you must pay the entire cost of your position upfront, so you cannot lose more than you invest.
CFD trading is highly similar to stock trading, except that you do not own the underlying share when you trade a contract for difference. You are not purchasing or selling the underlying asset when you trade CFDs, unlike investing in stocks. What you are buying is a contract between you and the CFD supplier.
The critical distinction between trading a CFD long and purchasing security is the leverage used. Because contracts for difference are traded on margin, there is no need to bind the total market value of buying the equivalent stock position. This also enables traders to open more prominent positions than their capital would ordinarily allow.
Contracts for difference and share trading are both strategies to profit from price swings in financial markets – and both can be included in your portfolio. Take a look at the significant points below to learn about the differences between CFD and share trading and determine which is best for you.
One CFD is ordinarily similar to one share, except that your provider will usually only demand you to put down 5% to 20% of the actual contract value when trading a different position.
When trading a share CFD with a 5% margin, you can acquire exposure to up to twenty times the number of shares for the same capital outlay as a physical share investor. For example, if you paid $400 for 5 shares of XYZ, you would have to pay $2000 ($400 x 5). However, if you acquired 5 XYZ CFDs at $400 and the margin requirement was 10%, you would only be needed to pay $200, leaving you with money to utilize on more transactions.
Due to the leverage used, the net result is a return (or loss) of 10 times or more the money invested in CFDs over shares. Because CFDs are traded on margin, contracts for separate trades incur finance charges while holding a position, which does not apply to share trades.