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While Contract for Differences (CFDs) are similar to Stock trading, there are some key differences between the two. The main difference is that traders do not own the underlying asset in CFD trading. In contrast, Stock trading involves taking ownership of an asset.
What are CFDs?
A CFD is a type of derivative trading that allows traders to speculate on the falling and rising prices of fast-moving global financial assets like Commodities, Shares, Forex, and Precious Metals. Once the contract ends, the trader and the broker exchange the difference between a specific asset’s opening and closing prices. You can either make a profit or a loss, depending on what direction your selected assets end up moving.
What are Stocks?
A Stock is all the shares put together that represent a part of a publicly listed company. Traders own a fraction of the corporation. This is because they pay for the Stock’s market value and profit or incur losses from price movements.
CFD vs Stock trading: Which is better?
Margin trading
CFDs work on margin, which means that you only need to deposit a smaller capital to enter a market. If you wish to enter the Forex market for $100,000, and the margin requirement set by the foreign exchange is 20%, you only need to deposit $20,000 to open a position worth $100,000.
On the other hand, Stock trading is not done on margin. This means that you have to pay the entire market value to enter the market. If you want to open a position valued at $100,000, you will have to pay the entire amount.
Tax benefits
CFDs are exempted from paying stamp duties. Traders only need to pay the capital gains tax on profits they earn. Incurred losses can be offset against a profit as a tax deduction. Hence, your overall cost is lower.
For Stocks, stamp duties need to be paid as well as long-term gains. Capital gains tax is also applicable to all profits.
Shorting a trade
Traders can short a CFD position to possibly benefit from falling markets. For example, you wish to trade Nike’s shares through CFDs at $200. You then decide to sell 50 of them and close the position as soon as the share prices reach $195 per share. This is so that you can make a $250 profit since ($200-$195)*50=$250. There are no additional costs involved since you do not own actual Nike assets.
Meanwhile, shorting Stocks in the market requires you to borrow shares from a broker. You then sell those and repurchase them later at a lower rate to benefit from the falling markets. However, borrowing is not easy, especially under names that are not liquid or have limited Stock availability.
Trading hours and range of markets
In most cases, CFDs are traded 24/5. Trading CFDs allows you to enter a range of markets like Share CFDs, Commodities, and even Forex.
Stocks are traded according to their defined locations. For example, you can do it from 9:30 am to 4 pm EST in the US market. The time difference can act as a barrier for people across the globe who wish to trade in the New York Stock Exchange. Also, it does not offer a varied range of markets as you can only trade company shares and exchange-traded funds (ETFs).
CFDs or Stocks: Is there a winner?
Both come with their own advantages and disadvantages, so it ultimately depends on a trader’s capabilities and needs. CFDs are more flexible, offer leveraged trading, and expose you to various markets. However, investing in Stocks provides you with actual ownership of an asset. It gives you a sense of authority over a specific company.
Choosing between the two depends on your trading style, expectations, and capital available for investments. If you do not have considerable capital in hand, CFDs may be the right choice. At Blueberry Markets, you can trade CFDs to enter several markets, including Forex, AU and US Shares, and Commodities.
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