Is CFD Trading Better than Investing?

When it comes to trading, traders have the ability to choose from a variety of options. A couple of popular options are CFD trading and investing in stocks. Understanding both and their differences will help you decide which one of the two is best for you.

However, being aware of the limitations and opportunities both offers may encourage you to explore both CFD trading and investing. Below, we aim to discuss both CFDs and investing, including what they are, the opportunities they may offer, and the risks involved.

Trading or investing?

Frequently, people tend to use the two words interchangeably, but there is a subtle difference in their meaning, which is also key in our discussion here. The key difference has to do with time. Stock trading is about buying and selling shares to make short-term profit, within a week or a day.

On the other hand, investing refers to buying and selling stocks to make long-term gains, for example, within months or years. In this respect, investing is considered long-term and with lower risk, while trading is short-term and involves more risk.

Что такое CFD?

Although many of us may already know what a CFD is, here’s a quick introduction to this popular derivative product. CFD stands for a Contract For Difference.

Contracts for Difference or CFDs are agreements that give the opportunity to traders to profit from the asset’s price movement without actually owning it. This is why it is preferable to describe those who trade CFDs as traders rather than investors. With CFDs, traders speculate on the price changes of the underlying asset targeting quicker profits than long-term gains like an investor would typically do.

Что такое торговля CFD?

Basically CFD trading involves buying and selling CFDs and imitates, in a way, a traditional trade in the sense that it will make a profit if the market moves up or down. The interesting thing with CFDs is that you can go long and short, without having to actually buy or sell the physical asset.

How to trade CFDs

1. Choose your preferred market.
2. Decide whether you want to Buy or Sell: Choose ‘buy’ if you think the price will rise in value or ‘sell’ if you think the price will drop in value.
3. Choose how many CFDs you intend to trade.
4. Place a Stop Loss: If the price moves unexpectedly and away from what you expect it to go, then an order to close your position at a specific price will help you manage losses and protect your funds.
5. Monitor your trade and close anytime you wish.

Pros and Cons of CFDs

Understanding the pros and cons of CFDs will help you decide whether to trade them or not. Let’s start with their pros.

CFD pros

• CFDs allow you to trade multiple markets and participate in the global financial markets using your broker’s platform. Different brokers offer a wide range of global financial products, so you can explore opportunities through CFDs in a wide array of markets.
• Moreover, CFDs provide investors with higher leverage than when dealing with traditional trading.
• Shorting (profiting from stocks that decline in value) is not allowed, without borrowing costs since the asset is not owned by you. So what you can do is either borrow instruments before selling short or have separate margin requirements for long and short-term positions.
• You can day trade without any restrictions. You can open an account with as little as $100, although many trading platforms may require a minimum of $1,000 or more.

CFD cons:

• CFDs tend to come with a high level of risk including liquidity risks and required margins that must be kept. If you are unable to cover costs or losses, your positions may be closed by your provider.
• With having to pay the spread on exits and entries, you will find it difficult to make any gains from smaller moves.
• You don’t own the underlying asset, so you cannot participate in any successes in the case of stocks and their companies performing well.
• Overnight financing costs may rise sharply and you may incur significant costs.

What is investing?

In the case of investing, you are basically buying shares and you actually have direct ownership, giving you the opportunity to be a part of the company’s growth. This gives you direct ownership over a certain number of shares of any given asset. This allows investors to directly gain from any increase in the share price over time. Depending on the number of shares you purchase, you may also be allowed to get dividends and voting rights.

Pros and cons

Investing is a more traditional way of participating in the financial markets. First, let’s look at the pros.

Investing pros:

• Simple to purchase and sell online and easy to understand.
• As the economy grows, so do some companies. You can invest in them and enjoy the rewards.
• Most stocks have a 10% annual return, which means you can get ahead of inflation, which is lower than that.
• You can day trade or buy and hold.
• You can sell them very easily.

Investing cons:

• Investing in traditional stocks comes with risks: you can make money, or lose it all.
• A lot of research and time to plan.
• If you aren’t a preferred stockholder or creditor, you will be paid last if the company goes bankrupt.
• Wild volatility can lead to missed opportunities.

Investing vs CFD trading: Which should you choose?

While investing may involve less risk and can be suitable for almost anyone who wants to grow their capital growth, it is not without risk and involves considerable time researching and finding the right stocks and opportunities. An easier way to explore popular companies and a wide range of sectors is through index funds.

On the other hand, CFD trading may be suitable for those who are after quicker profits and want to focus on multiple and fast trades throughout the day, let’s say. At the same time, they should also be willing to dedicate enough time to learning the ins and outs of the CFD markets and how to trade effectively and consistently. Here the risks may be higher and can increase with the use of leverage.

Торговля CFD с IronFX

This is where a reliable and trusted broker comes in. If you want to trade CFDs across multiple markets, then IronFX is a great option for you. The CFD broker offers a wide range of markets and has an extensive library of resources, training courses, webinars, podcasts, articles, how-to videos, and anything else you may need to get you started.

The leading broker is popular for its flexible leverage and tight spreads, fast execution, and quick and easy withdrawals. The broker’s multilingual client support team is available 24/5 to help you with opening an account or depositing funds. A dedicated account manager can also be reached and can help you with the trading process and explain how everything works. Once you are ready, you will be able to access 500+ financial instruments across 6 asset classes. This includes forex, metals, futures, shares, indices and commodities.

Disclaimer:
This information is not considered as 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.

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