CFD Trading vs. Traditional Stock Trading: Which Is the Best Option for You?

When trading, investors make choices between doing CFD and a traditional stock trade. Both methods have their respective advantages and disadvantages; therefore, it is necessary to compare them before you settle on one that suits you best. While both enable one to trade in the financial markets, the mechanics and the opportunities presented by the methods differ greatly.

CFD trading just enables you to speculate about price movements without needing to obtain the underlying asset. With CFDs, you can trade not only stocks but also commodities, indices, and even cryptocurrencies. The huge advantage of CFD trading is that they are flexible. You can go long if you think the price will be higher or short if you think it will go lower. This ability to make profits in both upward and downward markets makes CFD trading the perfect platform for most traders seeking to get out of the short-term fluctuations of prices.

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While stock trading entails buying and owning shares of a company. When you buy a stock, you become the partial owner of the company. Your profit or loss is made based on the movements of the stock’s prices. The stocks are rather long-term investment instruments because they own equity in the company’s growth. With time, stock value appreciates and sometimes pays for dividends for the shareholders. Long-term prospects for growth make CFD a very attractive passive investment for most people.

One of the main differences is the amount of leverage that comes with CFD trading. With CFDs, a position can be leveraged into a slightly smaller capital entry. While this magnifies the potential profits, so, too are the potential losses. Traditional stock trading does not usually provide this kind of leverage. While margin accounts do exist and are available from some brokers, it is usually less complex where the investment is based on the actual value of shares bought.

This also follows through the sense of managing risk. In the business of CFD trading, one has to be able to manage risk as leverage can drive losses to amounts higher than one expects. The size of the position needs to be known as well as where to set a stop-loss order to protect oneself. Risks in stock trading are lower simply because one owns the asset outright. However, your stock can still become volatile and market downturns and changes in value can impact your holdings.

Another difference is in the cost. CFD trading usually incurs spreads (the difference between selling and buying prices) and overnight financing charges in case of long-term position holdings. Stock trading in a traditional way relates to fees which may comprise a fixed sum, or a percentage of the transaction.

The final decision between CFD trading and traditional stock trading would depend on your trading style and trade goal. Since CFD trading affords the flexibility to go long or short, it makes it more suited to the active traders who take a slice of the short-term price movement. Traditional stock trading does, on the other hand, suit the long-term investor who seeks growth as well as income through dividends. Each method comes with risks; thus, assessing your financial goals and the extent of risk tolerance before investment are inevitable.