It would be worthwhile to note the difference between CFDs (contracts for differences) and ordinary shares, before getting into the advantages of using one for the other. Contracts for differences are basically agreements that are made on the price movement of an underlying asset. This asset could be anything that represents some value for the two parties which have entered into an agreement over its price movement. This means that the asset could be a commodity, like oil or gold. The asset could also be another financial instrument, like a stock share for instance. On the other hand, stock is a unit of capital that a person owns in a company. This could be a company listed in a local or international stock exchange market. It could also be a unit of capital in a privately owned company. However, for our discussion, only stocks owned in publicly traded companies (companies that have their shares listed in a stock exchange) will be considered.
There are many advantages and benefits that a person can enjoy when trading in CFDs instead of trading in stock. Some of these advantages have been listed below:
1) CFDs offer one greater leverage than ordinary shares
The very first thing that you should note with CFDs is that they offer you greater leverage to improve your returns than shares do. This is mainly due to the fact that you do not have to invest all your capital in a contract for difference in order to get the maximum returns out of that contract. For instance, if you put in 400 USD in a CFD, it is possible for you to trade positions that are valued at 4000USD or higher. This means that you would enjoy the profits accrued at the 4000USD level, without having put in that much money in the first money. The 3600USD that remained in your account could have been used for other business activities.
It is this ability to leverage CFDs that has made them very popular with savvy investors. This is very unlike trading in stock, where you have to put up the full value of the shares before you can fully enjoy the profits of trading at that position.
2) Convenience and flexibility
When you have a trading account in contracts for differences, you will be able to access a wide range of asset categories, all from one account. You could trade in commodities, paper assets or even real estate assets, as long as a CFD exists for each asset listed above. When you own shares of a company in one account, you can only trade in those shares that you have actually bought through that account. This can be quite limiting, and it might not prove to be worthwhile for you as an investor, seeing that your money would be tied down in one place.
The ability to invest in very many assets using very little cash is very attractive to investors who want to maximize their returns in the fastest time possible.
3) Low transaction costs have also made CFDs very easy to trade in
The costs of trading in contracts for differences are very low, which means that almost anyone can enter into this market and make a lot of money out of CFDs. However, you have to have a good amount of money that can cover any loss that you will make if a CFD that you have entered into does not go your way. The leverage that you enjoy when trading in contracts for differences will work against you when you make a loss.
Our selection of verified and recommended brokers:
Here are the brokers that our experts have rigorously hand-picked and verified to help guide you towards your financial goals with confidence and peace of mind.
Quality customer service 🏆
Advantages
Minimum deposit: £0
Spreads: 0.5 pip on S&P 500, 1 pip on FTSE 100, 1 pip on CAC 40
Open and close your positions 24/5
Trading simulator with £10,000 virtual funds
Integration with TradingView and ProRealTime
Over 50 years of expertise
Recommended broker 🏆
Advantages
Min deposit: £10
Spreads: 0.1 pip on eur/usd and eur/gbp, 0.3 pip for the sp500 and 0.8 pip for the FTSE 100
Buy shares and ETFs with no commission
Online courses for investors of all levels
Demo account with £20,000 virtual funds
Ultra-low spreads 🏆
Advantages
Minimum deposit: £0
Spreads: 0.5 pip on EUR/USD, 0.45 pip on FTSE 100 and 0.8 pip on EUR/GBP and EUR/CHF
Over 20 years of experience
Fund protection up to 1 million GBP
Ultra-competitive spreads
Advanced chart analysis with TradingView
Quality customer service 🏆
Advantages
Minimum deposit: £0
Spreads: 0.5 pip on S&P 500, 1 pip on FTSE 100, 1 pip on CAC 40
Open and close your positions 24/5
Trading simulator with £10,000 virtual funds
Integration with TradingView and ProRealTime
Over 50 years of expertise
Recommended broker 🏆
Advantages
Min deposit: £10
Spreads: 0.1 pip on eur/usd and eur/gbp, 0.3 pip for the sp500 and 0.8 pip for the FTSE 100
Buy shares and ETFs with no commission
Online courses for investors of all levels
Demo account with £20,000 virtual funds
Ultra-low spreads 🏆
Advantages
Minimum deposit: £0
Spreads: 0.5 pip on EUR/USD, 0.45 pip on FTSE 100 and 0.8 pip on EUR/GBP and EUR/CHF
Over 20 years of experience
Fund protection up to 1 million GBP
Ultra-competitive spreads
Advanced chart analysis with TradingView
CFDs are more beneficial to you as an investor than trading in shares. You should definitely take the plunge today.
