What Are the Differences Between the Stock Exchange and Stock CFDs?

What Are the Differences Between the Stock Exchange and Stock CFDs?

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Written on

Sep, 2019

Updated on

Aug, 2020

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Financial engineering had been one of the reasons why the world managed to evolve so much during the past few decades. Technological developments had fostered the appearance of new financial instruments, and thus, those involved in the industry had been huge beneficiaries. The stock market is where public companies are being traded 5 days a week, with people trying to profit in many different ways.

Stocks vs. stocks CFD

When you own a company’s stock, you become a shareholder, basically owning a small piece of the underlying business. Stocks are liquid, meaning their prices fluctuate based on supply and demand principles, so you profit when the stock goes up, or when the company pays dividends.

However, trading with physical stocks is not on the taste of all people. Considering that there is an increasing number of companies which do not pay dividends, traders had been attracted by new instruments, some of them being Contracts for Difference (CFDs).

Trading CFDs means you don’t own the underlying instrument and you are able to generate return solely on the rising and falling of the price. Most of the popular trading companies available at the present time offer CFD trading. Although some had developed complex offers, like the stock exchange DMA trading, most of the traders deal with CFDs.

Most of the platforms who allow access directly to the stock exchanges, work on a commission-based system. For each stock you purchase, you’ll have to pay a commission. In dealing with CFDs, on the other hand, the system is most of the time based on spreads (the difference between the bid and ask price) and an overnight swap.

CFD trading is, thus, a more affordable way to get involved in the stock market without having to own stocks. Although you’re not eligible to receive dividends, you’ll be dealing with volatile instruments, meaning price variations over given periods of time, will be high.

In order to choose the right type of instruments, you must carefully consider some important aspects. How much capital can you commit, which broker is the right for you, what type of strategy will you use (short-term trading or a long-term approach), as well as what are the most suitable trading costs for you. The bottom line is that both stock and CFD trading carry advantages and disadvantages, and it is up to you to decide how can you put them into the balance.

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