Are CFDs better than shares?

Contracts for Difference (CFDs) and shares are both popular methods for trading. In this article, we’ll explore the differences between CFDs and shares trading, and look at the unique features of each type.

About CFDs and shares

CFDs: CFDs are derivative products that allow you to speculate on the price movements of different financial instruments, including stocks, indices, currencies, and commodities. You do not actually own the underlying asset. You can go both long (buy) or short (sell), speculating on whether the price of an asset will rise or fall, respectively.

Shares: Also known as stocks, shares represent ownership in a company. When you buy shares, you are actually buying a share of the company. As the company’s value increases, the value of its shares increases as well. Therefore, shareholders make profits through the increase in stock price and the dividends that companies pay quarterly to their shareholders. Stocks are usually bought and sold on stock exchanges, for e.g. New York Stock Exchange, London Stock Exchange, etc.

The differences between CFDs and shares

1. Leverage

CFDs: With CFDs, you can use leverage; this means you can control larger positions with a smaller amount of capital. Leverage can increase your profit potential, but it can also increase your losses.

Shares: Investing in traditional shares involves buying physical shares with a big amount of capital and without leverage. You need to pay the full value of the position upfront, and you cannot lose more than your initial investment.

2. Ownership and dividends

CFDs: CFDs are derivative products, so you do not own the underlying asset. This means you do not receive any dividends or voting rights connected to the shares.

Shares: When you buy shares, you own a share in the company and are entitled to dividends. You may also have voting rights.

3. Costs and fees

CFDs: CFD trading often has lower transaction costs compared to traditional shares trading.

Shares: Buying and selling shares usually involve higher transaction costs, such as brokerage fees, exchange fees, and other charges.

4. Market access and flexibility

CFDs: CFDs offer access to a wide range of markets, including stocks, indices, currencies, and commodities. With such a large range of instruments, traders can diversify their portfolios and capitalise on trading opportunities across multiple asset classes.

Shares: Traditional share trading involves buying and holding shares. It does not have the versatility of CFDs regarding market access and the ability to profit from downward price movements.

5. Long and short positions

CFDs: With CFDs, you have the option to go short (sell) and profit from falling markets in addition to going long (buy) and profiting from rising markets.

Shares: With shares trading, you can only make a profit when the price of the asset is rising.

Why invest in shares?

Shares are commonly issued as a way for companies to raise funding, research and development, expansion of business operations, etc.

Traders invest in shares for a number of reasons, including:

• Increasing savings: investing in shares can multiply your wealth over time
• Return on investment: Shares provide the opportunity to earn returns on investment (ROI) through dividends and capital appreciation
• Inflation protection: Stocks help to protect the value of invested money from inflation
• Unlimited earning potential: There is no cap on potential earnings, offering the chance of big gains.
• Diversification: Investing in stocks allows you to diversify your investment portfolio, spreading risk across different asset classes and industries.

Trading shares via CFDs

There are several steps in the process of getting started with CFD stock trading.

Let’s consider these:

1. Set clear financial goals.

Ask yourself whether this will be short-term or a long-term investment plan. Consider your budget as well as your tolerance for risk which is probably most important. Just remember that trading is highly risky and the potential for losing all your money is high. Therefore, make sure your financial goals align with how much you wish to invest and the amount you’re willing to lose.

2. Learn the basics of CFD share trading.

You must have a proper understanding of what CFD trading involves and familiarise yourself with stock market terminology. In addition, it is very important to know about technical analysis and fundamental analysis. For reference, fundamental analysis refers to the study of a company’s earnings reports, financial statements and overall financial health. Technical analysis on the other hand involves analysing historical price charts and patterns in order to be able to speculate on future price movements, an essential part of CFD stock trading.

3. Access free trading education.

There are lots of online educational resources available for free to help you enhance your understanding of CFD stock trading. This includes books, blogs, online courses, podcasts, seminars, to help you become a more informed trader.

4. Develop a solid CFD stock trading plan.

The plan should outline your trading strategy, entry and exit criteria, position sizing, and the risk management techniques you’ll use to protect your funds. Sticking to the plan is essential for long-term success.

5. Choose a CFD broker who will help you achieve your trading goals.

Choose a reputable CFD broker. One that offers competitive trading conditions, a user-friendly platform and reliable 24/5 customer support. Additionally, you should ensure that the broker provides access to a wide range of shares to diversify your portfolio.

6. Sign up for a demo trading account.

With a demo account, you can learn more about trading without risking your own funds. In a simulated trading environment, you can execute trades, practice technical and fundamental analysis, evaluate outcomes and make necessary adjustments.

Using virtual funds allows you to test out different trading strategies to see which one aligns best with your trading needs and goals. By spending enough time on a demo trading account, you will gain the experience, knowledge and confidence necessary to move to a live trading account.

How to start trading CFD on shares

1. Choose your CFD broker.
2. Open een account.
3. Decide whether to go long (buy) or short (sell) on specific shares, based on the price movement of the underlying shares.
4. Select your position size.
5. Apply a stop-loss order to limit the risk of significant losses.
6. Monitor your positions.

Remember that CFD trading carries a high level of risk, especially when using leverage. A well-thought-out plan and effective risk management strategies are important to limit the risk of losing your capital.

Start trading shares with IronFX

IronFX is a leading broker, used by traders worldwide for a number of reasons. These include a secure trading environment, flexible leverage, competitive spreads, fast withdrawals and deposits, and fast execution speeds.

With IronFX, traders have access to over 500 financial instruments across several asset classes like stocks, forex, metals, commodities, futures, indices, etc. IronFX also offers different trading accounts for traders of all skill levels.

Furthermore, the forex broker offers 24/5 multilingual customer support through different channels such as live chat, email, and an informative FAQ page. Traders can also access a wealth of educational resources to learn more about CFD stock trading.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.