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CFDs vs. Stocks – Choosing the Best Option for You

CFDs vs Stocks
Written by Andy

Overview of CFDs and Stocks

A Contract For Difference, commonly known as a CFD, is the term used to refer to a contract that is signed between a buyer and seller of an asset. In a CFD, the buyer is required to pay the seller the difference between the current value of the asset and its value at a predetermined date, i.e. the contract time or expiry date. Some people prefer CFDs because they allow you to trade but without ownership of the asset, which also means that any risk associated with it for the duration of the agreement falls away from you. Despite this, you still have the potential to profit off its future value. CFDs are only concerned with the price change between entry and exit date. That being said, there are also certain costs that are associated with such an agreement. In some cases, commission is a consideration, while finance costs may be applicable for those that are looking to keep a long-term position.

Stock trading, on the other hand, refers to investing in a portion of a public company which is seen as potentially lucrative or promising. Stocks are generally listed on a stock exchange, where the public will have access to its financial information, such as the share price, as well as its overall performance in the market. The share price can be affected by several factors, such as global conditions, politics, economics and the company’s leadership and management. Although many people who are looking to explore the financial market and trading often start by trading forex currencies, stock trading is also becoming quite popular. Tech companies, in particular, are amongst those that have gained additional interest in the past year due to how the world was forced to turn to digital solutions for both work and leisure.

Which one you should invest in

When it comes to deciding which one of the two to invest in, there are some notable differentiators to be cognizant of. Moreover, your personal preferences, risk tolerance and investment period will also ultimately guide your decision on what to invest in. CFDs allow you to trade a variety of instruments, such as shares, indices, forex and commodities. Stocks only allow for the trading of shares and ETFs. While CFDs offer no real shareholder privileges, stocks allow shareholders to receive dividends which are declared based on the performance of the company and its share value. Additionally, investing in stocks means that you also receive shareholder privileges such as voting rights. While stock trading offers limited risk to your initial investment, losses when investing in CFDs can be more than the initial deposits on a particular position, which some might view as a major drawback because of the potential major losses it presents. If you are an investor looking to diversify your portfolio, investing in both may be worth exploring. Both options look to take advantage of and capitalise on price movements in the financial markets, and because both react differently to market conditions, investing in both could allow you to offset any losses of one investment against the other if necessary.

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Andy

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