CFD is a very risky trade that is why there are some brokers who try to sweetly talk to some traders in order to easily sell their contracts. They do this by telling people that CFDs are the same with stocks. This is wrong! So to increase your awareness on distinguishing the difference between the two trading goods, we bring you this post.
7 Key differences between CFD and Stocks
1.Trading CFD has a similar nature to gambling because it lets you bet on a particular movement in the market even without owning the asset. Stock trading on the other hand is the buying or selling of equities or shares in a specific exchange.
- As an owner of share or equity, a trader is also given the privilege to become a VIP in a particular company. This means that, depending upon the share size, a trader may be asked to join a stockholders meeting and has a privilege to vote in case of company decisions.
- Purchasing shares may require payments for commissions, custody fee, taxes and other charges that a particular country imposes. In the case of CFD, a trader is typically asked to pay spread and other charges such as commissions, funding adjustment and overnight fees.
- Stocks are fixed trade while CFDs are flexible. It is flexible because it can be traded with other forms such as stocks, currencies, commodities and many more.
- Stock CFD deals are patterned after the traditional stocks trading minus the privilege of owning the asset.
- Some companies offer dividend payments to stock investors. CFDs on the other hand do not have this feature because a trader for CFDs may profit from leverage.
- Stocks trading allows a trader to focus on his assets one at a time. It is as diverse as CFDs but the difference lies in account management. In the case of CFD, a trader can transact in multiple markets using a single account.
Dangers of Investing on CFDs
1.The first threat when it comes to trading CFD concerns leverage. As a naturally leveraged product, some brokers may offer huge leverage to attract you from signing up an account with them. You have to be careful and be aware that leverage may work as a double edged sword. Though it may increase your profit a hundredfold, it could also let you lose more than your margin.
- CFDs are not as regulated as stocks. Thus, it may be prone to several changes depending upon the trading rules in your country. There are also countries where CFD transactions are banned.
- Because CFDs are traded via inflation rates, gapping of payment may occur. Gapping happens when the fast movement of rates cause CFD to depreciate before executing a position.
When it comes to legal matters, some argue that CFD is not a legit trade. This notion is indeed debatable because of the fact that trading with this instrument is undeniably dangerous but profit promising. It is not as secured as stocks trading that is why we suggest that you seek legal and financial advice in case you wish to involve yourself with it.