Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this Markets in Focus we take a closer look at the difference between CFD’s and investing.
Let’s examine the difference between buying stock and CFD’s on this type of asset.
What’s the difference between CFD’s and investing
CFD’s and investing are two separate ways to take a position on a market’s price movements. On the surface, that makes them seem similar – but they work in very different ways. Because unlike investing, with CFD’s trading you don’t ever own the asset you’re trading.
How investing works
When you invest in a market (such as a stock), you usually buy it and add it to your portfolio.Then, when the time comes to close your position you sell it on and collect the difference in its price as profit – unless you have to sell it for a loss.
How CFD’s work
When you trade a market via CFD’s, you don’t buy it and add it to your portfolio. Instead, you buy a contract for difference (CFD). This is a type of financial product that tracks the live price of a specific financial asset, such as a stock.When you close your position, you’ll exchange the difference in the asset’s price with us as your provider. If it’s gone up, you’ll earn a profit. If it’s fallen, you’ll earn a loss.
Benefits of CFD trading
Let’s take a look at two major benefits of CFD trading: going short (sell) and leverage.
Going short
So far, we’ve only looked at going long by buying stocks with CFD’s. But because you don’t own the underlying asset, you’re not limited to long (buy) positions with contracts for difference. You can go short by selling a market at the outset instead.Shorting (sell) gives you a position that will profit if the underlying asset price falls instead of rising. It can be a useful method of targeting returns in bearish conditions.
Leverage
With leverage you can multiply the result of your stock trade by 5. This can be in your favour but if your trade goes is the wrong directon this works against you.
Do I need to trade with leverage
No, in the change App you can also trade without leverage using our Stocks product.With our Stocks product you can trade your whole favourite company share or a fraction of it with no leverage.We wish you a successful trading week. With or without using leverage.
Until next week!
