There are many different ways to enter the stock market, and not all of them involved the traditional methods of buying and selling.
While ownership of stocks and shares can be highly beneficial, it’s not as flexible as other options and may have greater tax implications. If you want to avoid these complications, you could opt for alternative stock market investments.
One of the most popular of these is CFDs, Contracts for Difference. Without ever owning the underlying stock, investors can speculate on price changes and reap the rewards if their prediction is correct. To the untrained eye, this may seem no different from gambling, but that’s not the case.
Here’s a closer look at the difference between CFD and gambling; and why it’s so essential to understand this.
An Investment, Not Gambling
Any stock market investment involves an element of risk. Some types of investment are more volatile than others; this means they attract a higher risk but potentially could deliver a higher return.
However, just because an investment has some risk doesn’t mean it qualifies as gambling. This is the case with CFDs, a bona fide form of investment subject to proper financial regulation. You can find guides for CFD trading in your country, along with information about adequately managing risk.
You should never trade with money that you can’t afford to lose, but there are ways to mitigate the risk. This is where CFDs are very different from gambling. The latter is purely based on luck, while CFDs require a degree of skill, knowledge and experience to help achieve the best results.
The Importance of Making a Distinction
You might be wondering whether it really matters how CFDs are viewed, as there’s no way to mitigate the risk altogether.
Understanding that CFDs are different to gambling is very important to those who are just starting out. Giving the impression that a CFD investment is nothing more than a spur-of-the-moment bet could lead to rash transactions being made, without any research. These types of trades are more liable to lose money, so a misunderstanding about how much knowledge is required can be a painful lesson to learn.
The reality is that learning about the specific market and the factors that influence price can help any investor make more accurate predictions. Stop loss orders can help to minimise losses if the market begins to move in the wrong direction.
All of these things mark out CFDs as being very different from gambling and underscore why it’s essential to understand the difference.
Want to Find Out More?
If you’ve heard of CFDs, you can find out more before diving into the market. Doing your research from trusted brokers will enable you to learn the facts before starting to trade. The best brokers provide a range of training guides to help you when you’re just starting out. These can be an invaluable introduction to trading, helping you avoid the pitfalls common for new traders.