It’s a common misconception that CFDs are the same as shares. While they both represent an investment in a company, they actually work in very different ways.
CFDs are derivatives, which means they don’t actually own any of the underlying assets (in this case, Apple shares). Instead, they allow you to speculate on whether an asset will go up or down in price.
Shares are direct investments in a company. It’s like buying a piece of that company – you own it and therefore have a stake in its performance.
In practice, CFDs can be used to trade on almost anything that has value: currencies, commodities, stock indices and bonds. However, most investors use them to speculate on financial markets such as stocks and commodities.
The main difference between cfd and shares is that you don’t actually own the underlying asset.
If you buy a share, you own part of a company. If the company does well, your investment will grow in value too. If your investment goes down in value, you can sell it at a lower price and take a loss or wait for it to recover.
With CFDs, you trade on the price movements of an asset without actually owning the underlying asset. When you buy a CFD, you’re speculating on whether its price will go up or down. You’re not investing in anything with your money but rather betting that its price will change by a certain amount over time.
For example, let’s say I want to bet on whether Apple stock goes up or down. I can do this by buying an Apple CFD from my broker instead of buying actual Apple shares from them (or from another broker). My broker would then hold my trade and manage it until it matured or got settled so that they didn’t need to worry about having enough cash on hand to cover me if my bet was successful (or if it went against me).
Table of Contents
Here we look at the key differences between CFDs and shares:
Costs:
The costs of trading shares are typically much lower than CFDs because they do not require leverage which can lead to significant losses if things go wrong.
Liquidity:
Shares tend to be more liquid because they trade on an exchange and there is always someone willing to buy or sell at any price. CFDs can be more difficult to trade at times due to a lack of liquidity for certain contracts or markets. So prices may not always reflect the fair value and spreads can be wider than normal market conditions allow for share trading on exchanges.
Leverage:
CFD traders can use leverage which increases their potential returns but also increases their potential losses if things go wrong (see ‘Risks’ below). Share traders cannot use leverage as they don’t own anything.
What Are the Benefits of Trading Shares?
There are several benefits of trading shares instead of CFDs. First, when you trade shares, you are actually buying real stock and owning it until you sell it back to the market. This means that if the price goes up, then your investment will be worth more money than before. It also means that if the price goes down, then your investment will be worthless money than before.
When trading CFD there is no ownership involved so there is no capital gains tax when trading them. However, there are commission costs associated with trading in stocks which need to be factored into your trades; these should be taken into account before entering a trade as they can affect your profits/losses significantly!
Pros of trading CFDs:
CFDs give you access to more markets than shares do, as there are fewer restrictions on which companies you can trade in with CFDs
You don’t need to own the actual shares in order to make money from them – this means you don’t have any capital restrictions when trading CFDsTrading costs for CFDs tend to be cheaper than trading shares directly (although this will depend on how much leverage you use). Check out best broker oanda
High Leverage
A CFD allows you to trade at very high leverage levels. If you want to buy $10,000 worth of shares, but only have $500 in your account, you can still do so with a CFD because it doesn’t require any cash on deposit. The broker will simply lend you the money needed to enter trades until profits are earned and paid back (or losses suffered).
No Fees or Commissions
Unlike some other types of financial trading products such as options or futures contracts, there are no fees or commissions involved when trading CFDs. You only pay once your position closes out and settles at its payout value (assuming that value isn’t negative). This makes CFDs ideal for short-term traders who don’t want to spend a lot on commissions every time they open and close positions.
Cons of trading CFDs:
You’re not actually buying real shares when trading CFDs – this means that if the company goes bust, your money won’t be protected by the Financial Services Compensation Scheme (FSCS), unlike when you buy real shares directly and hold them as an asset in your portfolio.
Conclusion
Weighing the pros and cons of CFDs and shares can be a daunting task. Both of these investment vehicles have their own advantages—and disadvantages—that potential investors will want to consider seriously before making a decision.
CFDs are particularly good for speculating on trends in the market, while shares are better suited to those who wish to earn regular income from their investment. These two investment vehicles cater to different types of investors, and they carry with them different levels of risk.
