Is it best to trade CFD stocks or actual stocks?

When we are talking about trading instruments there is always a comparison of various instruments with each other. We have stocks, forex, CFD, precious metal, etc. Each of them has its advantages and disadvantages. It only depends on a trader – whatever he or she prefers to do.

Trading has become very popular in recent years. Of course, we have an example of George Soros who managed to make a fortune back in the ’90s but it became widespread in the 21st century.

CFD stocks are relatively new to other instruments. Since CFDs hit the financial markets a few years ago, traders have wondered if they are a better financial instrument than stocks. In this article, we will talk about both of these instruments.

Which one is better?

As in many cases, the answer cannot be completely unambiguous. You just have to weigh the pros and cons of each of the trading instruments. Overall, the transition to CFD has had a positive effect on many active traders, but again the effect depends on a trader’s level of capitalization and his/her trading style.

To clear up the inaccuracies, we must first clarify that with contracts for difference, in fact, you do not own real shares. So, if you want to vote at the company’s annual shareholders’ meeting, just stick to trading ordinary shares. But you should know that there are serious financial benefits from using CFDs on stocks, as they are a derivative and allow the use of large leverage.

With the appearance of brokers, they also started to offer CFD trading, expanding their set of instruments. In general, brokers tend to have a lot of options for trading, which makes them more attractive to traders. Based on the instruments seen on T1Markets forex broker platform we can see that financial companies are becoming less one-dimensional and simple, covering more ground with the help of CFDs rather than focusing on just one instrument.

CFDs allow traders to access a wide market range of stocks, currency pairs, and commodities. Because of that, this broker decided to provide CFDs to have a more extensive list of instruments. Finding clients is also very easy when you have CFD available.

When trading CFDs, you can benefit from the change in the share price by paying only part of it. So, if your account is limited, contracts for difference can make it much easier for you. CFDs are in handy for a vast array of financial products, including indices and foreign equities. In addition, when trading contracts for difference, it is easy to take both a “short” and a “long” position.

If we look at trading in physical (actual) stocks, in the UK, for example, a short position can be both expensive and difficult to maintain. In addition, renewal of the position is often required every 20 days. This means that every time you extend your position you actually pay a commission to the broker and a 0.5% transfer fee.

We should also note that the possibility of using leverage is also “restricted”. Unlike ordinary stock trading, short CFD positions are easy and can be held indefinitely. For example, if you open a position to sell a CFD on stocks or an instrument whose price you expect to fall, you can later close your position by buying it back at an even lower price.

Perhaps the only argument you will find against CFD trading is the cost of financing. Usually, when you pay only a small part of the value of the investment (that means you use leverage), you are charged interest on the amount you borrowed. This is the situation that happens with futures trading. The interest rate is not high – just a few points above the lending rate. So, if you prefer short-term trading and hold your position for a few weeks at most, then your profits will easily cover the interest rate, leaving you extra income.

Unlike stock trading, in CFD transactions, prices are equated to market prices every day. In this way, your account is credited or debited depending on the change in value and interest rate. This means that you can receive a request to deposit additional funds in your account when it decreases. In this case, you will need to transfer funds to your broker. For this reason, many experts advise to use only about half of the funds in CFD transactions, and the rest to be kept as reserves for such cases.

Because contracts for difference follow market prices, you can receive capital in your account without closing your position. It is then possible to continue trading while still holding a successful trade. This is not feasible when investing in stocks, but you still have to be extremely careful, because the risk does not go away.

Conclusion

After all, contracts for difference have many advantages over traditional stock trading, and every investor should include them in their portfolio, giving it more efficiency. Once again there is no clear answer or guide which will tell you which option is better because both of them has their pros and cons. Which one is better for you will come only with experience.