The primary difference between CFDs vs stocks is that share trading requires you to purchase a company’s stock, while a CFD merely tracks the stock’s price movements. When you trade with CFD shares, you also do not take ownership of the asset like you would when purchasing shares. Instead, you are merely speculating its value.
With CFD share trading, you only need to pay the price difference from when you open your position until the time you close it. This means that novices and traders with limited capital can engage in CFD share trading for much less money than stock investment.
CFDs vs. Stock Trading:
Key differences and benefits
| Properties | CFDs | Stock Trading |
|---|---|---|
| Capital Leverage | Yes | No |
| Stock Ownership | No | Yes |
| Going long or short | Yes | Yes (more complex to go short) |
| Flexible trading hours | 24/7, 5 days a week | Only during stock exchange hours |
| Ability to trade in multiple markets | Yes | No, equities and ETFs only |
| Transparency | Yes, the forex market is difficult to manipulate | No, businesses can control stock prices |
Trade other assets in the same CFD account
Another advantage in the CFD vs. Stock Trading comparison is the ability to trade other types of assets through the same account.
CFD share trading is a convenient alternative to trading actual shares. You can also trade index CFDs instead of relying on ETFs and mutual funds.
CFDs and margin accounts can also be used to engage in forex trading or speculate on cryptocurrencies. With CFD brokers like TMGM, you can also get access to energy commodities like crude oil and less-volatile investments like gold and silver CFDs.
Greater exposure to international markets
Traders with a CFD account will have access to major companies listed in Europe, Japan, Hong Kong, the UK, Australia, and the US. This saves you from opening a brokerage account in each country or using bank-issued certificates that track foreign stocks. CFD trading is convenient for novice and experienced traders to gain exposure to shares in other countries.
Differences between CFDs and other derivatives
CFDs are derivatives, like options and futures. However, there are some crucial differences between these contract types.
- CFDs track the price of the underlying stock. However, they do not give you the right or obligation to buy or sell the stock. You only collect or pay the difference between the opening and closing prices.
- Options give you the right to purchase or sell a stock at a specific price before contract expiration. You can trade options without exercising them. However, because of time value and other factors, options do not track the underlying market prices as closely as CFDs. Also, options expire, while CFDs do not. If you are willing to pay the fees for holding a CFD overnight, you can hypothetically keep it forever.
- Futures give you the obligation to purchase a stock at a specific price on its expiration day. Futures follow the market more closely than options, but because they have an expiration, pricing is more complex than it is with CFDs.
- Both futures and options trade on regulated exchanges in their home countries. CFDs trade globally. For example, you can open an account in Australia and trade CFD shares of US-listed stocks even though you do not have a US-based account.
By almost every metric, CFDs share trading is much more accessible than trading stock options or futures.
Find the best broker for trading CFD shares
You should always seek a regulated broker like TMGM who can provide access to state-of-the-art trading platform like MetaTrader 4.
You can contact us 24/7 and get support for your trading activities. This is essential to start CFD share trading on international markets.
Open an account to get started today.
Frequently Ask Question
Technically, CFDs do not expire. However, you may have to pay fees if you hold the contract for more than a day. Some strategies, such as hedging, may require buying and holding CFDs. However, there is another reason why the lack of an expiration date is important.
Options and other expiring contracts experience something called time decay. Time decay is when the value of the contract decreases as it approaches expiration. Even if the underlying market is rising rapidly, the option could decrease in value. Because they do not expire, CFDs do not experience this phenomenon, making them the best derivative for tracking stocks.
Options and other expiring contracts experience something called time decay. Time decay is when the value of the contract decreases as it approaches expiration. Even if the underlying market is rising rapidly, the option could decrease in value. Because they do not expire, CFDs do not experience this phenomenon, making them the best derivative for tracking stocks.
Though some investors use CFDs for day trading, it is possible to hold a position overnight. However, there are certain costs you should consider if you choose to keep your position open.
Holding costs include overnight fees on share CFDs. These costs get charged nightly, so if you hold the CFD for one year, you will need to calculate the cost x 365. Fees are assessed to buy positions and credited to sell positions. However, they could be adjusted to account for any costs associated with margins.
Holding costs include overnight fees on share CFDs. These costs get charged nightly, so if you hold the CFD for one year, you will need to calculate the cost x 365. Fees are assessed to buy positions and credited to sell positions. However, they could be adjusted to account for any costs associated with margins.
The contract size of a CFD trade can vary depending on the underlying asset. For example, currencies trade in "lots," and crude oil trades in barrels. CFD share trading is one of the simplest contract sizes to calculate because one contract equals one share of the underlying stock. You usually trade more than one contract, especially if you employ leverage. However, the one-to-one ratio will always apply when you calculate position size.