The following is a guest blog post:
My primary aim has always been to make a supplemental and steady income that would last. That was one of the reasons why I even got myself to any kind of trading. I am not one of those people who loves taking great risks. Give me few extra bucks with almost zero risk and I will pluck your hands, every time. Before I ever came across CFD trading I have always traded classical stocks, not making a lot of money on dividends, but steady with a very little risk.
What is the difference between CFD trading and shares trading
These two types of trading are very similar, but they both have their own benefits to which we will get in a minute. The main difference with CFD trading is that we do not own the underlying share. What we own is a contract between yourself and the CFD provider.
Contract for difference is a margin based trading. That means you do not have to pay the full market value of a stock. As a result of this, you are capable of opening much larger positions than your capital would otherwise allow you.
The reason why I quit dividend trading and went for contracts for difference.
I do not have a lot of capital which I could just simply put aside and use it explicitly for trading. So when I traded classic stock options I was greatly limited. I was never quite able to call the whole market price I needed to make a solid profit. In order to earn decent money, you need to invest appropriate amounts which might be a problem for some, as it is for me. If you decide to use most of your capital in one position you can not exploit other trading opportunities (you can, but you would have to sell a portion of your stock portfolio). But if you have CFD account with $1 000 you can buy stocks in the worth of $20 000 if you decide so. I love this advantage because now I can take advantage of more trading opportunities, or I can implement hedging my positions and save some of my trades when they are turning up as unprofitable, you are not usually capable of doing that in classic stock trading.
Main benefits of CFD
- All CFDs are liberated from stamp duty of 0.5% which conventional stock traders have to pay when they trade shares from England, Wales or Northern Ireland
- The possibility to trade with a leverage. You do not need to call the whole market price. A fraction of 10% of the real value is sufficient. So if needed, you have enough capital for hedging.
- The trading is direct on live prices, there is no such thing as waiting for the execution of orders.
- Making profit is achievable even when the stocks are falling down (short position).
- Availability to trade enormous amount not only of shares, but also indices, forex and commodities. (Usually around 2k+- instruments).
Guaranteed stop loss.
Disadvantages of CFD trading versus stock trading
Overnight fee is charged to every CFD transaction that is opened overnight. However, this is not a factor if you stay in position for less than 40-90 days.
Spread – most CFD brokers charge for a spread. This is a thing that depends from broker to broker, but they are usually around 2-10 pips.
CFD demo account for safe enter
If you came to the conclusion that CFD really has more advantages than classic stock trading then I have a little advice for you. Start on a CFD practise demo account, they are usually for free and they will allow you to test this type of trading on your own without any risks. Once you get the hang of it, you can move to real trading. Leverage trading can secure you way bigger income than dividend trading, but it can also lose you more money. That is one of the main reasons why I highly recommend to anyone to start on a practise demo.
Conclusion – What is better CFD or stock trading?
There is probably no real better. That being said, I think that CFD has in my opinion, more advantages than stock trading. You can be more flexible with your trades and once you get used to margin based trading, there are no limits to what you can earn. You avoid paying commissions and stamp duty, but you have to pay for a spread and overnight fee (if you stay in position overnight). So it all comes down to what a trader prefers.
Do you have your own experience with CFD trading or would you like to try it yourself? Or you still rather want to keep trading classic options? Please share your thoughts in the discussion below.