Contracts for Difference (CFD) trading is a popular way to earn online. Together with investing, these are known to be popular methods that involve the financial market. But CFD trading and investing have their own differences and distinguishing each one of them helps you identify the right one for you. With the proper use of reputable tools from IRESS, you can get close to achieving success in trading.
The Difference between CFD trading and Investing
Investing and trading CFDs are two different ways of taking a position on the price movement of an asset. Their main difference is that in CFD, you don’t have to buy the underlying asset but when you invest, you take ownership of the underlying asset only by buying the financial product.
And since you don’t actually own the underlying asset, you are free from your stamp duty obligation. What you will have to pay is the capital gains tax in every profit that you have.
Contracts for Difference is quite popular among active and retail traders. Investors, meanwhile, are passive. When you invest, you tend to hold the positions not just for days but for months and even years. This type of investment is for long-term results. On the other hand, CFD traders ought to close their positions at the end of the trading day to avoid overnight charges.
But it doesn’t mean that you cannot hold a CFD position for long, weeks, months, and years. You can do so if you are sure of your trading position and you are aiming for a bigger profit. The key advantages of CFD trading against investing are that CFD traders can go short, offering a wide range of markets, and can access leverage.
What is Leverage in CFD Trading?
As mentioned above, one of the key advantages of CFD trading is leverage. With leverage, you will pay a small percentage of the asset’s value and you get the full market exposure. Most of the time, the leverage offered by brokers can go as small as 5% and you will have to pay it to start trading.
Even though you put a deposit of just 5% of the actual position value. Then, your profit or loss will still be the same as the actual full size. You can either take the full profit or take the full loss if the market goes against your predictions.
Going Short or Going Long
Trading CFD, you are allowed to go long or go short. When going long, you are buying in the market and when you go short, you sell in the market. When you go short, you are expecting that the underlying asset will fall.
What Can I Trade in CFD?
When trading CFD, you are allowed to deal with a huge range of markets including, equity, forex, commodities, shares, indices and so much more.
Is it possible to lose more than the money you invested in CFD?
Retail investors are covered with negative balance protection, the reason why losses can be limited to the amount available in the trader’s account.
Which one is better, Investing or CFD trading?
If you are wondering which one to venture into, it is fair to say that these two have unique features and corresponding benefits as well. The choice is yours to make. Understanding these two gives you knowledge on which one to venture. You should also use IRESS trading software for a more convenient trading experience.