If you are relatively new to the stock market and trading, choosing how to go about investing your money and hopefully making a profit can be difficult. For many new traders, the stock market is where they find themselves as it is one of the most popular and well-known methods of investing. However, investing in stocks and shares can mean that it takes time to make a profit, and can also be quite risky in that stock values are subject to constant change. Because of this, more and more new traders are opting for short term investments by trading on the CFD (Contracts for difference) market instead.
What’s the Difference?
CFD trading is in many ways similar to trading on the stock market, however, the difference is that when you trade a contract for difference on the CFD market, the underlying share is not owned by you. Unlike investing in stocks, trading CFDs does not require you to physically buy the underlying asset. In short, what you actually buy is a contract between yourself and the CFD provider. The key difference between trading shares and CFDs is the leverage which is employed. Contracts for difference are traded on margin, meaning that is no need to purchase the full equivalent stock position and tie up the full market value, leaving you with money to invest elsewhere. For more information on CFD trading, visit CTrader.
How CFD Trading Works
When trading on the CFD market, one contract for difference is usually equivalent to one share, except that with a CFD position, your provider will usually only require you to put down 5-20% of the actual market value in order to make a trade. Because of this, CFD trading is often much more appealing to new traders as it does not require them to put down as much capital up front, making it an excellent method of investing without the need to already have much capital available to trade. The fact that CFDs are traded on margin means that you are effectively borrowing money from your provider and implies that contracts for difference trading attracts finance charges whilst a position is held, which does not apply to share trades.
Although CFD trading is becoming more and more of a popular alternative to trading on the stock market, there is one downside to this form of trading. Because geared trading can be riskier than trading on the stock market, traders using this method could find that they lose their initial outlay plus more, resulting in their account being wiped out and left with debts to their provider. Whilst this cannot happen when you buy physical shares, it’s good to note that there are a lot of resources out there for CFD traders to use in order to ensure that this does not happen. Managed trading accounts, demo accounts, and even CFD trading mentors are all available to help new traders get off the ground.
Do you think that CFD trading or stock market trading is the best option? We’d love to hear from you in the comments.