There are many differences that can be looked into stock CFDs and stocks. Despite a lot of forex brokers advertising that they often offer trading in stocks, there is a lot of difference between trading stocks from the exchange as compared to Trading CFD.
CFD are actually derivatives and that means that you are able to trade and speculate with this form of financial trading without needing to own the underlying asset physically. This enables the traders to move into trading at a fast rate instead of usually waiting on certifications to be able to trade.
There are many forms of CFDs that you can trade. From Bonds, to commodities, precious metals to stock indices. The CFDs prices for trading are based on the underlying market instrument. You may look into as an example, if you trade the stock CFD for Amazon, you are basically transacting based on the derivative instrument of the company’s stock which is also based on the actual prices of their stocks in the exchange.
Stocks Vs. Stock CFDs
- Stock CFDs allow you to go short or long with the instrument
- Stock CFDs prices are marked up often and enable overnight swap rates.
- Stock CFDs are mostly used by traders for hedging
- Trading Stock CFDs enable you to gain access to trades where you normally would not be able to gain access from and will enable you to engage in the trades with only a small amount of capital involved. Stock CFD are leveraged products hence the reason why most traders would get into trading them as a better alternative.
- When Trading CFD, you do not actually own any of the shares as you are speculating.
- Stock CFDs enable you to get a credit or debit of the dividends basing on your position
Small Capital Required
A lot of traders get into trading CFD for a few reasons and one of them is their ability to create trades without needing to shell out a lot in capital. When you trade in stocks, and buy shares of 10 for $100, you would need to come up with $10,000 in capital just to initiate this. When in CFD, you may buy the same stocks in a contract and all you have to do is shell out $200 for a leverage of 1:50
When you engage in this form of financial market, it is very easy for any trader to speculate and access this form of trading. Despite there not being a lot of difference between the stock CFD and the stock price, there are bound to be forms of markup in the process. CFD will usually have marks up and the spread may be a bit higher compared to the actual stock prices
Despite the trade stock CFDs becoming accessible versus actual stocks, it sometimes comes off better in stocks as the dividends pay as well. There are a lot of pros and cons in trading CFD or actual stock and it will be up to the trader to see where their trading plans and needs would fit.