What is the difference between buying stocks and trading CFDs? In fact, the answer is inherent in the same question. The main difference is that while buying shares you buy and then become the owner of the stock, with CFDs you trade (trading) and then you do not become the owner of the stock but you trade on the underlying. In this article we will see all the main differences between shares and CFDs so that the reader receives a good information base from which to undertake an investment in the long, medium or short term.
What is an Equity CFD?
Financial trading sees among its main instruments the cfd stock, or a Contract for Difference that has as its underlying stock. In practice, instead of buying or selling shares, you trade derivative securities called this because their value comes from the value of the underlying security. These are “passive” securities, since their value depends exclusively on the performance of the “asset” security. Therefore, to summarize:
Share: “asset” security, asset or underlying of the CFD
CFD: a “liability” security, its value derives from the share price
This way, when, for example, the Apple share price increases, the price of the CFD will also increase. On the contrary, when the stock sees a price decrease, the CFD on that particular stock will also decrease in price.
Once that is established, we see a big difference between CFDs and shares.
Taking Advantage Of Price Reductions
When trading CFDs, in addition to betting on the rise of a certain stock, you can also bet on its decline. In other words, if we think that Apple shares may fall, we can open a “short” position and then achieve positive economic results thanks to the fall in CFDs on Apple shares.
With CFDs you can open a position “Buy” when you think that the stock will get a rise in price after the opening of the position. Similarly, you can open a “Sell” position when you think that the stock will fall after the position is opened.
Leverage To Multiply Your Budget
Another difference between buying stocks and trading CFDs is in the leverage. Through the leverage effect, for each trade we will be able to move many more stocks than we could trade with our own budget. For example, Plus500 offers a maximum leverage of 1:30 with which to open a position on an instrument exposing up to 30 times less than its nominal value.
It is therefore easy to understand why trading is recommended only to those who are willing to “risk”, ie to put a certain budget at risk to aim for profits very quickly.
Short, Medium, Long Term
When you want to invest in the medium or long term, stocks are definitely more recommended than CFDs. In fact, stock CFDs are designed for those who want to achieve economic results in a very short time and therefore invest over several months, a year or more on a simple purchase is not part of the logic of online trading.
For this reason, when we talk about shares or bonds we talk about investment. This term is used to describe the use of money to achieve a medium or long term result. For the online trading of CFDs on shares, on the other hand, the term “trading” or “speculation” is preferred and more suitable, which in technical terms means an activity aimed at taking advantage of price changes based on events of various kinds (eg. publication of financial statements, etc..).
Diversity Of Approach By The User
A very important difference between buying and selling shares and trading CFDs online is the approach of the trader or investor. In fact, while with stocks you simply rely on a certain budget in the hands of the bank and its specialized advisors, with trading it is the user who has to follow day by day (or several times during the day) the progress of their operations.
In online trading you may need or choose to close a position after you have made a certain profit, or after you have reached a certain loss threshold. To help us in the operations of every day intervene the functions of STOP of the trading platforms, among which we highlight the function of the “stop loss” with which you set a quota for the automatic closure of the position in the face of a loss, and the function of the “stop limit” with which you set a quota for the automatic closure of the position in the face of a profit.
To help the online CFD trader, moreover, there is certainly the opportunity to follow your trades from your mobile device, such as smartphones or tablets, wherever you are.
Annual Report, Daily Or Weekly Report
Depending on how often you want to “pull the money”, we can better define whether we are more interested in buying shares and reselling them, or trading CFDs. In fact, while we will be advised to wait at least a year to draw up a balance sheet, or well that goes from 6 to 8 months, with CFDs the balance sheet can be drawn day by day and therefore have a situation of your balance sheet always very up to date. Every day, every week, you can make a balance of your income and expenditure, without even taking paper, pen and calculator. All this will always be clearly visible on the trading platform’s history.
Those who have short-term goals, therefore, or those who want to evaluate the effects of online trading in a short time, will find in the trading of equity CFDs a very interesting environment and full of opportunities.
Variety Of Stocks Available
When you turn to the bank to invest in stocks you can browse through brochures or leaflets with different securities depending on your needs. Usually, in Italy are offered mainly Italian shares that can be found on the indices of the Italian Stock Exchange including the famous FTSE MIB, which includes the securities of companies with greater capitalization.
Some stock CFD trading platforms, on the other hand, offer the opportunity to choose from thousands of stocks from stock markets around the world, including the Italian one. In fact, in addition to the securities in the FTSE Mib, you can trade on shares listed on Wall Street or New York (Nasdaq, NYSE, Dow Jones), Tokyo, Frankfurt, Paris, London, Hong Kong and many other markets.
For this reason, for those who want to start trading stocks with CFDs, we recommend the Plus500 platform, as it offers the widest range of securities to trade on (more than 2,000 securities). You can start with real money right away, or with virtual money via a demo account.
The demo account is great for practice, learning, or simply testing the product. It is a globally licensed broker whose company is based in London and is listed on the London Stock Exchange.
To open a free trading account, click here. You can trade in real mode or in demo mode, depending on how ready you feel to trade. You can even start with just €100. However, we recommend a slightly higher amount in order to have more flexibility and a more “breathable” account.