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Misconception of Trading CFD and Stock

3 min read

A lot of brokers would often sell you the idea that it would be best to invest your hard earned money for the future. Whether it be for a retirement fund or even possibly a passive form of additional income, investing in financial markets is something that you can really get your hands on. However, you have probably looked into the potential of CFD Trading but what is it exactly? Is it the same as trading stocks? We have broken down their differences for you so as to not get both mixed up.

Stock market trading

Shares, equities, better known with the term stocks, is a unit of ownership with different institutions. Usually institutions or companies that have gone public have a list of their shares in the stock exchange that can be purchased by individuals.

Contract for Difference

Contract for difference or CFD is basically a form of trading where a contract is made between a broker and a client and enables the client to speculate on price movements of different kinds of underlying assets. What is great about trading CFD is that this form of financial investment lets your trade without being able to own the assets physically. A lot of traders get into this form of trading with this as their primary reason and take advantage of this feature.

Risk of Trading CFD

One of the risks of trading CFD is upon sign up, you will be offered leverages. This is practically a multiplier for your trades as it enables you to have big gains by trading with only a small amount of money. For example, if you get a 1:10 leverage and trade using this condition, a $1000 can turn into a miraculous $10,000 gain. However, the risk with CFDs is the situation where the market goes the other way, away from your speculated outcome. If you put a $1,000 trade and you lose the said transaction, you will need to pay the remaining $9,000 to your broker. The risk of trading CFD is its ability to give you massive losses quickly as compared to other forms of trading.

Trading CFD is mostly for those potential investors who have already garnered experience in the different forms of money management or have a suitable background with trading CFDs as the market is very volatile and can be very unrelenting for those who have not been able to handle trading plans or disciplined trading.

Investment through speculation

There are a lot of advantages when it comes to speculating instead of owning the actual asset. In terms of stock trading, there will be a waiting period for certification and getting the necessary documents that will enable you to trade the stocks in the market. Although this permits you to gather advantages for yourself, a lot of traders, especially during the modern age, would rather trade quickly as compared to traditional methods. Trading CFDs will allow you to commence trades based on a diverse range of assets without the hassle of waiting for certification to come into your mail.

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