Excitement is the number one emotion that newbie traders tend to feel on their first trade. But most of the time, the excitement that they felt are overpowered with fear as they see the real side of trading. You cannot trade in financial market if you don’t want risks. The risks involved boils down to the kinds of investment that you want to partake.
Finding and understanding the right investment is very important to attain success in trading. Without knowing the details of your choice of investment beforehand, huge losses could be incurred. If you are torn between investing in direct stock trading and CFD stock trading, you may want to read along and check out the distinction between these two. Differentiating them and knowing their strengths will make the process of selection smoother. Only then, you will be able to come up with the best ideas for investment portfolio, available for you to try them and adapt them to your own game.
CFD Trading vs. Direct Stock Trading
Contract For Difference (CFD) is a distinct derivative product that provides additional investment options. It gives traders a chance to profit out of the settlement differences. The process starts when a trader draws a contract with the broker. Then the broker speculates on the price of the underlying asset which can move in either direction, go up or down. When you enter a trade, a long or short position, you also enter an entry or exit price.
As for direct stock trading, you purchase and own the stocks and you can decide when to sell it. The main difference between CFD trading and stock trading is ownership. Traditional investors always want to own physical stocks. But for new traders, the unique opportunity that CFD trading suggests is quite appealing and catching. There are still a couple of advantages of CFD trading that you should know.
Pros
· Leverage and margin are both included in CFD trading. With leverage trades, you do not need to have the full amount to start a trade. The trader can magnify the capital. As for margins, you just need 50% of the entire amount to start a trade. These great features of CFD trading offer benefits on the capital amount, whilst, you cannot get it with the traditional stock trading.
· Another advantage of CFD trading is its tax considerations. In the United States, trading CFD is under the swap contracts which have an ordinary capital profit or loss. You can use an income tax calculator to factor in your capital gains or losses when you file your annual tax return. In the United Kingdom, losses can be used to offset profits to sustain taxes without the need for stamp duty.
· CFD is bi-directional which means that you can hedge it averse to traditional stocks trading. You can profit from CFD even with falling markets. Leverage is also very helpful because you can invest with a small capital and profit huge with the right prediction.
· One of the most prominent advantages of CFD trading is the trader’s exposure to a wide range of assets such as bonds, commodities, and Forex. As with stocks, they are more specific.
Cons
· CFD is under higher risk. If you enter a trade without much knowledge, you will most likely be at the losing end.
· CFDs are new compared to stocks that already have historical reliability.
· Leverage should be used well. High leverage cannot guarantee high returns.
