There are many ways through which wealth is grown, and some of the most common approaches investors use include CFDs trading and traditional investment. Both have merits and demerits, but knowing the difference between the two will enable you to know what best suits your financial goals.
Trading with CFDs has more flexibility and is more active compared to traditional investing. The main appeal of CFDs is that they allow you to speculate on the movements of asset prices without necessarily owning them. For example, with share CFD trading, you can make money from a company’s stock price increasing or decreasing without ever buying or selling the actual shares. This means you trade on both upward and downward movements of the price, hence, giving you more chances for profit in different market situations.
Traditional investing is buying an asset, such as stock, bond, or real estate, and holding it, hoping to benefit from an increase in the value over time, either through the appreciation of the asset or receiving dividends. Traditionally, investors would buy their assets and sit on them for years hoping that over time the value would go up. But with share CFDs trading, you can be so active, going in and out of positions in a matter of minutes, hours, or days depending on how the markets are performing.
The other big difference is that of leverage. Leverage is often presented by the broker when trading on CFDs, so the smaller investment will allow controlling a bigger position. Such a leverage ratio of 10:1 will enable you to trade a position ten times smaller than your initial investment in case of which you magnify your profit or magnify your loss. Of course, in traditional investing one doesn’t apply leverage since he pays all the price for the asset. This makes traditional investment less risky in comparison but also less potentially lucrative in the short term.
Risk versus reward is a very important consideration in comparing CFDs trading with traditional investing. Although CFDs allow making quick profits by capitalising on market fluctuations, making use of leverage can create an easy way to run up losses if not carefully managed. Generally, traditional investing turns out to be more stable and less volatile, but usually requires much time to grow. Traditional investment risks may also often be slower but require constant monitoring, whereas CFDs trading may pose a higher risk to your investments sooner.
Both offer various levels of accessibilities. CFDs enable the traders to trade 24/7 on different markets such as stocks, commodities, and currencies. It provides more flexibility than the traditional investing that may need market hours and carries a high amount of upfront, especially in the purchasing of stocks or even other assets.
Basically, it will depend on your particular objectives, tolerance for risk, and the level of interest in actively managing your investment. If you want to be flexible, generate high short-term gains potential, and do not mind monitoring markets closely, then share CFDs trading will be the best suited for you. However, if you like sitting back, less eager to take risks, and open for long-term growth, traditional investing will do more justice.
