Stock trading and CFD trading help provide a means to profit in the movement of prices in the financial market. But just like many traders, you might also get confused as to what is the best option for you or what suits you best. In this case, you must be able to differentiate these two so you can have a good comparison.
Understanding CFD Trading
Contract For Difference is a derivative product that speculates the rise and fall of the underlying asset’s price. This can all be done without actually owning the underlying asset. For instance, you are seeing that the value of Facebook shares will rise. All you have to do is to buy a CFD stock from a reliable broker and speculate on the value. If the value increases, then you can sell the CFD stocks that you have at a new and much higher price. The difference between the opening and closing price will then be returned to your account by your broker. That will be your profit.
Understanding Share Trading
Share trading, or also called stock trading, is the actual buy or sell of company shares. If you choose this option, you not only get to speculate in the market but you also have some rights to the company where you bought your shares. Let’s take the previous example about Facebook shares. In share trading, if you are expecting that the price of Facebook stocks will rise, you can purchase 10 Facebook shares. By the time the value rises, you can sell your Facebook shares and get some profit.
Difference Between Stock Trading and CFD Trading
This is the most obvious difference between CFD trading and Stocks trading. In CFDs, you do not own the underlying asset while in Stocks trading, you get to deal with the company shares after buying its full amount. In CFD, you do not need to enter a legal contract to speculate on the price movement of the company stocks.
In addition to ownership, leverage is another difference worth mentioning. In CFD, you are offering a considerable amount of leverage to open positions. When talking about leverage, it is very convenient for retail traders because they get to open a couple of positions without paying the full amount of the underlying asset. But leverage is not offered in Stocks trading, which means that you need to pay the full amount of the underlying asset to have it as your own.
Variety of Markets
As you all know, if you choose to trade stocks, you only get to trade company shares. But with CFD, you don’t only get the chance to trade company shares but also indices, commodities, cryptocurrencies, and Forex. All the trading activity can be done in a single CFD trading platform.
CFD traders in the UK, they are exempted from paying UK Stamp Duty if they choose to trade CFDs. The reason behind the exemption is the fact that traders do not really own the underlying asset of the ones they are trading, unlike when they trade company shares where they get the full ownership of it.