What is the difference between trading CFDs vs Stocks?

Dalia Holmes
July 31, 2020

What is the difference between trading CFDs vs Stocks?

CFD trading is very similar and often mistaken to stocks or shares trading. The key difference between the two is the following.

When you trade CFDs you don’t own the underlying asset. Instead, you are buying a contract between yourself and the CFD provider. With a CFD you never actually own the asset or instrument you have chosen to trade. You can still benefit from if the market moves in your favour or make a loss should the market move against you but when you trade CFDs you don’t own the underlying asset.

With a classical stock or share trading you own the underlying asset.

To summarise when you trade CFDs you don’t own the underlying asset but when you trade stocks you own the underlying asset.

You might ask why trade CFDs when I can just trade stocks?

That is a good question and there are many reasons why one might consider using CFDs over stock trading but here are the key differences!

CFDs

1) You can trade wide variety of financial  instruments, including shares, commodities, forex, crypto and others.

2) You can use leverage x2, x5, x10, x200 in some cases even x500

3) Losses can exceed initial deposits

4) You can go long or short the market

5) Trade 24/7 on number of markets. Some markets never sleep!

6) No shareholder privileges

7) Trading fees tend to be higher

Share/Stock Trading

1) You can only trade shares and ETFs

2) Pay the full value of your shares up front

3) Limit risk to your initial outlay

4) Trade only on rising prices

5) Trade only when markets/exchanges are open

6) Own the underlying asset and receive shareholder privileges, such as voting rights on major company issues

7) Trading fees low

To summarise whenever you plan to short a market/stock or use leverage you automatically enter into a CFD trade meaning you don’t have the right to the underlying asset anymore. You enter into a contract between yourself and the CFD provider.

Should I trade CFDs?

CFD trading can be dangerous if you plan to use leverage 10:1, 100:1, 500:1. If you are considering trying out CFD trading we’d recommend starting out conservative meaning if you want to use leverage use 2:1, 3:1 leverage for starters. Once you have built up confidence and understand the market a bit better you can move ahead and use higher leverage. 

Same goes for shorting stocks. Don’t short a stock with all of your capital. Brokers like eToro, Capital.com and others allow making trades with small amounts. You can easily short stocks starting 50$and take it from there.

Free virtual account with eToro!

If you are looking to trade CFDs you can open up a free virtual demo account with eToro and have a couple of practice rounds. eToro virtual account works like a real account but the only difference is that the money (100K) is not real. Once you are ready to make real trades you can easily top up your account and start trading CFDs with real money.

We at Finerds have made real CFD trades with different brokers to show you how it works in real life. Click to see more!

Open Free Demo Account With Etoro!

Where can I trade CFDs?



If you are ready to start trading CFDs we'd recommend these two platforms! One of them is eToro and second platform is Capital.com. You can check our reviews on these platforms by clicking here.



Disclaimer:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

If you have any questions please get in touch with info@finerds.io