Trading and investing in companies through the buying and selling of stocks or shares has been around for at least 400 years, with the first formal stock exchange opening in Amsterdam in the 1600s.
CFDs, however, are much newer having first been traded in London in the early 1990’s having been developed by Brian Kellan and Jon Wood from UBS Warburg.
Stocks vs CFDs
Buying stocks allows you to own a share of a company meaning you own the underlying asset, but with Contracts for Difference (CFDs) you do not own the asset, you own a contract which you can sell to potentially make a profit from the change in the market value of the stock. The key difference is that owning a stock is ownership of an asset, whereas owning a CFD is owning a right to buy or sell a derivative at a future price.
The Advantages of CFDs vs Stocks
CFDs provide many advantages over traditional stock ownership, for example with CFDs you have leverage built-in, almost like options, but without time working against you. There are thousands of CFD’s that allow you to trade, with leverage not only stocks, but Foreign Exchange (Currency), Cryptocurrencies, Indices and even Commodities.
Additionally, Using CFDs allows you to trade as frequently as you like by bypassing the frequent trading rules that are placed on traditional stock trading.
The Advantages of Stocks vs CFDs
Owning stocks is seen as being less risky than trading CFDs because you own the underlying stock, however, stock trading also has many risks. If you are trading often, you can lose money through commissions and leakage.
Stocks can also be purchased across the globe on any of the hundreds of exchanges, whereas if you want to trade CFDs you have to be resident in a country where CFDs are allowed.
For example, in the USA, India and other countries, the trading of CFDs is forbidden by regulators. However, in Europe, Australi, New Zealand and many Asian COuntries CFDs are permitted.
Difference Between Stock Trading & CFD Trading
|Stocks vs CFDs||Stocks||CFDs|
|Own a Share in a Company||✔||✘|
|Able to use Leverage||✘||✔|
|Able to profit Long or Short||✘||✔|
|Losses can exceed your initial deposit||✘||✔|
|Profit from Dividends||✔||✘|
|Complicated Fee Structures||✘||✔|
|Shareholder Voting & AGM||✔||✘|
|Available in the USA||✔||✘|
|Available in Europe, Australia & Asia||✔||✔|
So there are many differences between investing in stocks and trading CFDs. Because CFDs allow you to use leverage in your trading they are inherently riskier because leverage magnifies both your profits and your losses.
However, with that risk comes benefits, namely a larger trading window and the ability to trade currencies, commodities, and indices.
Finally, do not forget that the majority of people that trade CFDs lose money, make sure you are well trained and have experience before exposing yourself to any leverage, whether buying or selling stock options or trading CFDs.