What Is The Difference Between CFDs and Traditional Shares Trading?

It’s a commonplace to ask about the similarities between CFDs and spread betting, but if you are wondering about trading in Contracts for Difference then it might be more helpful if you were to ask: what is the difference between CFDs and traditional shares trading? When it comes to trading in CFDs and traditional share dealing, you are not dealing with two principles that are mutually exclusive. There are many successful traders who do both as part of their maintenance of a diverse portfolio. You may decide to do the same. When you learn what is the difference between CFDs and traditional shares trading? you might like to try your hand at both.

Do bear in mind though that the essential answer to the question what is the difference between CFDs and traditional shares trading is the all-important matter of leverage. This double-edged financial sword can both make you a lot of money and also lose you a great deal of money. The risk factor is higher with CFD trading, which are leveraged products. Always take advice and conduct research before making a decision, though you should of course do that with any form of investment or speculation. Here the answer to the question: what is the difference between CFDs and traditional shares trading is, not a lot really.

After that theoretical introduction to our discussion of the question: what is the difference between CFDs and traditional shares trading, we will now move onto to some more specific differences. When you buy shares you are making a direct investment in a company and acquiring a say in the ownership of that company. A CFD on the other hand is an agreement between a broker and yourself, speculating on the movement in price of an asset. You do not own the underlying asset, which could be a share or a commodity. You have merely agreed to settle the difference between the opening and closing prices of the asset at the end of the CFD. This is the fundamental answer to our question what is the difference between CFDs and traditional shares trading.

When we started discussing the matter of what is the difference between CFDs and traditional shares trading, we mentioned leverage. CFDs are traded on what is called a margin, which means in effect that you pay only a small percentage of the asset’s worth, perhaps as little as five per cent. If you bought 1000 conventional shares at £5 a share then you would have to pay £5,000. To enter into a CFD for those 1000 shares you might only pay as little as £250 up front. Remember though that you have effectively borrowed the other £4,750 and that this must be repaid when the contract ends. CFDs make large profits possible and also large losses. That is the real answer to the question what is the difference between CFDs and traditional shares trading.

Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment. 

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