Stock CFDs are defined as contracts for difference by which traders can speculate on the moving stock prices without owning shares. Therefore, they do become an excellent alternative for those who look to gain in both up and falling markets. The stock CFDs are a type of trading that is very close to ordinary trading. Still, some of the differences may bring about great influence over the traders’ strategy or risk management.
In stock trading, you essentially are purchasing shares of a company, becoming a partial owner. As the company increases or decreases in value, so does the price of its stock; therefore, you can sell your shares at a higher price than you purchased them for. However, to get your money back, you must hold the stock for some time; this usually means a longer term of time, a more passive approach.
A stock CFD, however, does not necessarily require you to own that stock. Instead, an investor enters into a contract with the broker to exchange the difference in the stock price from the opening of the contract to its close. This means you can take advantage of price movements without actually having to own or keep a stock on your shelves. This provides both upward and downward price movement as a trading opportunity. This characteristic of stock CFDs makes them relatively attractive for active traders.
The second difference is the provision of leverage in stock CFDs. In dealing with stock CFDs, a broker usually facilitates the trade using leverage. This means you would be controlling a larger position by having a rather smaller amount of capital. For instance, if your leverage is 5:1, you might then open a position of five times your initial investment. Amplification of profits through leverage can still expose the account to chances of loss at times because both gains and losses are amplified by the leverage.
This definitely does not apply to the traditional form of stock trading whereby one has to outright pay for the shares bought. Stock CFDs, therefore, can be a much more accessible avenue for those who do not have and cannot afford such large capitals to invest. However, leverage carries various risks that, if not well managed, can lead to serious losses.
One of the great benefits of trading stock CFDs is that they can be traded in margin, and it makes traders open positions for amounts they would not otherwise afford. Stop-loss orders are often used to restrict potential losses, and take-profit orders to seal the deal whenever the price reaches a specific level. Apart from these, the option of trading short positions- which means betting on a downward price- gives more flexibility to the traders than in the traditional stock trading.
Ultimately, since stock CFDs and traditional stocks are options for profit from the financial markets, the stock CFDs offer more leeway to the trader with quicker trade execution and leverage to trade. Still, it goes hand in hand with increased risk, especially for those who have never traded on margin. So this calls for fully understanding how the things work before entering the field.
