How CFDs differ from classic stocks – What is better to trade

The following article is a guest blog post:

When we trade conventional stocks at stock broker we have to pay a full market value to get a share of a company. With this being said, we are required to invest enough capital to make at least some profit. It is a steady and not a very risky way of making money. But in order to make a desirable income, we have to put on the line money which we very often don’t have. And explicitly with this “problem” deals CFD trading. Never heard about this type of investing? That’s fine because here comes a short lesson from me.

What CFD is and how is traded

CFD is a shortage which stands for a contract for difference. When we trade CFDs we get from the broker a contract (so we do not directly own the shares as with classic stock trading). It is almost the same, except from one important aspect. CFDs are traded on a margin which means we pay just for a part of the stock price. So, if you were to pay 20 000 dollars to your regular stockbroker to get appropriate shares, it would mean that with CFD you would need only 1 000 $ to create this investment. That is because you have to pay only a margin. The rest of the stock price will the broker for you. It is a great advantage for people who do not have the capital for stock trading but they still consider themselves to be good traders.

Is CFD riskier than conventional stock trading?

That depends on you and how well you can work with a leverage. If you do not have any experience with leverage trading, then CFD might be risky for you. And that is for one simple reason if the price of stock changes even just a bit it might have a great impact on your capital. But on the other hand, your capital allows you to create trades which you wouldn’t be otherwise capable of opening. So every pip which goes in your chosen direction will make you a substantial sum.

How to get to CFD safely – demo account

If you do not want to risk even a small capital (as CFD brokers allow accounts even from 100 dollars), you can grab a free CFD demo account. This version of an account will grant you an access to all features of a regular CFD account. The only thing which is different is that you are investing fictional funds. It’s a great way to get used to margin trading without worrying about your capital.

Some advantages of CFD trading

  • Making money is possible even when the price goes down (short position).
  • CFD traders do not have to pay stamp duty
  • Only a portion of the stock price is necessary to invest in order to open a position (around 10%)
  • CFDs grants you the access to over 3 000 instruments which are composed aside of stocks also from forex, indices, commodities and ETFs
  • Guaranteed stop loss

So is really CFD so much better than classic stock options?

CFD have some great benefits, but that still does not necessarily mean that they are the right fit for everyone. Some people do have enough capital to create positions they like at their conventional stockbroker, but some people might not have it and will greatly appreciate leverage trading.

And what about you? Is it the first time you have heard about CFD and you are intrigued by its benefits? Or do you hate the idea to create trades with a leverage? Either way, share your ideas and comments bellow, I will happily answer all of them.

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