When it comes to engaging in financial markets, there are many investment opportunities to explore. You can invest in stocks, shares, currency, and even commodities like wheat. Some investment channels are similar while others are radically different. The key here is to understand the difference between traditional financial trading and CFDs.
Traditional financial trading or share dealing enables the investor to take ownership or a stake in an underlying asset. CFD trading on the other hand just allows you to speculate on the movement (rise or fall) of the underlying asset without ever taking ownership.
CFD stands for Contract for Difference. What that mean is if the price moves in the direction of your bet, you will stand to turn a profit. But if the underlying asset moves against you, you’ll incur a loss. It’s really a contract between the broker and the investor.
There are many advantages of trading CFDs, so its popularity has steadily grown over the past few years. The main advantage of trading CFDs rather than traditional financial trading is savings on the broker’s margin.
For example, if you were to buy stock, then your broker would require a 50% margin. With a CFD broker, you usually won’t need a margin more than 5%.
Higher Leverage: CFDs provide a significantly higher leverage than standard leverage.
Global Market Access: You can access international markets from a single platform.
No Shorting Rules: No traditional rules that stop you from shorting at certain times.
Borrowing StockCertain: No borrowing required before shorting.
Professional Trading without Fees: Most of the time, fees are not charged for CFD trades. So no commission or fees to enter or exit. The broker makes money only when the trader pays the spread.
Zero Day Trading Requirements: No minimum requirements. Most of the time, you can open an account with as little as a $1,000.
Several Trading Options: Currency, commodity, index, stock, and treasury.
As you have to pay the spread to enter and exit, small bets won’t lead to any profits. This means that the spread will decrease a little with a winning bet and increase a little with a losing bet.
So although you don’t have to deal with the commission, capital requirements, regulations, and trader fees, your profits do get trimmed through the larger spread.
Further, broker credibility is only based on lifespan, financial position, and reputation. So it’s important to figure out who you should trade with before choosing a broker that fits your needs. That is essentially the variation between standard share dealing and CFDs.