An investor will buy and later sell the actual stock when trading stocks. Trading CFDs is slightly different; you are not buying part of a company by trading CFDs but instead speculate on the underlying asset’s price movements without actually owning it. If you trade a share with a 5% gain during a day, you have made a 5% gain as well. If you are interested in CFD trading, check out a Saxo broker.
When trading CFDs, there are certain advantages over physical shares:
Lower entry price
CFDs do not require significant initial capital investments to get going. While it might be nice to purchase 100 shares for $20 each, this means that your investment sits at $2,000 before any gains have been had from those investments. With CFD trading, you can start trading with a much lower amount of capital.
Leverage
It allows you to double the gains and the losses made from your investment. In other words, if you have an investment of $5,000 and decide to trade with a leverage ratio of 1:10, then you will be able to make investments up to $50,000 for every dollar that you spend on margin. You could lose more than this or gain more than this, but it does allow a broader range of opportunities when investing money.
Less currency risk
There is no currency risk in the initial purchase price when using CFDs, unlike traditional stock investments where the currency risks are very prevalent (primarily when investing in foreign stocks).
Short selling is possible
Short selling is a technique where you can sell a stock that you don’t have – but instead, borrow it from someone else – and then repurchase it later when the price has dropped. While this isn’t always possible with all companies, some allow for short selling techniques. It allows you to profit from a drop in stock prices as well as profit from rising ones
Spreads are fixed
Unless your broker offers otherwise, spreads on CFDs will be fixed. What you see is what you get. When trading stocks, spreads aren’t fixed and may vary between brokers, which means it could potentially lead to losses if you’re not careful about which broker you’re using.
Margin call is less of an issue
Margin calls are mostly only an issue when trading stocks (especially if margins aren’t paid or maintained). When trading CFDs with a leverage ratio, you don’t need to worry about the broker calling in your investments immediately because of margin call
Transparency and market depth
CFD market spreads can be different from other markets, so seeing current prices and history information allows you to have a good idea of where prices might move. It allows for better speculative investment opportunities because you’ll know what could happen beforehand. Financial news websites generally provide great insight into this, allowing you to get a better idea of what’s going on in terms of market movements.
No ructions on prices
Unlike some other markets, such as Forex (foreign exchange), CFDs don’t have any ructions within the market. It means that you will not experience significant fluctuations in your investments, and any gains or losses made will be primarily down to yourself and what happens with the market.
You Can Trade 24/7
If you can access an internet connection, then you can trade CFDs anywhere and at any time of the day. Unlike traditional investment markets, they may only open during specific periods (such as stock markets generally open from 9:30 am – 4 pm). With CFD trading, there are no opening hours, making it very easy to make investments whenever you want.
Demo account
If your broker offers a demo account, you can use it to practice trading CFDs with the same tools and functionality as a real account. It allows you to learn better how to trade CFDs and gain some invaluable experience before making any risky investments for real money.
