Question: What is the difference between buying a share through a traditional broker versus trading it via a contract for difference?
Traders today are opting on trading CFDs instead of buying a share because of the great benefits and flexibility it gives them.
So you want to know the difference between buying shares and trading CFDs?
Many brokers like 24option offer the option of trading CFDs (contract for difference).
Which means that you don’t own the underlying asset, you enter into an agreement with your broker and exchange the cash difference in the opening and closing prices of the contract.
Leverage is the key difference
With CFD trading, the leverage is the key difference vs buying a security as it is traded on margin.
This means that you don’t need to invest all your funds in the full market value.
This gives you the ability to open larger positions and more options to diversify.
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Here are a number of differences between CFD and trading an underlying asset:
- With CFDs you trade on margin, depositing an initial deposit with your CFD broker. This gives you the ability to buy or sell a number of CFDs which is based on margin computations.
- In the UK you are exempt from paying a stamp duty of 0.5%, but you still need to pay capital gains tax on profits.
- You can trade short or long with CFDs with no need to deliver the underlying asset in case of a short sale.
With CFDs, you speculate on the price movements going up or down.
Your entry point and your exit point and the contract is between you and your broker.
You do not have the right to acquire or benefit from any ownership rights with CFD trading. It is purely an economic interest in the share.
Depending on your broker, you generally only need to put down 5% to 20% of the contract value with one CFD the equivalent to one share.
This means that with one share and a margin of 5% you have exposure of up to twenty times more shares for the same capital outlay.
As an example:
You purchase 5 shares of Microsoft at $400 = 5 x $200 you would have to pay $2,000.
Now with CFDs, if you bought 5 Microsoft shares at $400 with a margin of 10% you only need to pay out $200 leaving you with $1,800 to use on other trades.
The result is that you have the potential of returns of 10 times or more, using CFDs compared to shares because of the leverage (it could also work against you if you lose).
What’s the catch?
Like we said, it could also work against you if you were to short shares if the market moved sharply against you and opens you up to losing more than your initial outlay.
It could wipe out your account leaving you owing more funds to your CFD provider.
This does not happen if you buy physical shares.
What’s the real story?
First of all, finding a good reliable broker that offers good leverage that will give potentially big payouts is what CFD traders are looking for.
24option offers CFD traders some really good and realistic margins.
Take a look at some of their perks:
- A maximum margin of 1:400
- Spread on EUR/USD of 0.0003 pip
- Minimum lot size of 0.01
- A choice of some of the biggest and juiciest stocks to choose from like:
- And more!
Risk Warning: Trading forex and/or CFDs involves significant risk of loss. CFDs are leveraged products and it is possible to lose more than your initial investment.
In total, they offer over 150 assets!
Whilst leverage is an important factor when trading CFDs, having a safe and regulated broker with a good reputation like 24option is just as important.
24option is regulated by the International Financial Services Commission (IFSC) in Belize under Richfield Capital Limited, and the Cyprus Securities and Exchange Commission (CySEC).
They are a trusted broker and have been in business since 2009.
That’s already a decade!
Why is this important?
You are relying that your CFD provider is in a sound financial position and is well capitalized and in a sound financial position to meet their obligations.
CFDs are not standardized, with every provider having their own terms and conditions.
Here are more compelling reasons to trade CFDs:
- You can go short and take advantage of overvalued stock, benefiting from the fall of its share price.
- No stamp duty in UK and Ireland.
- Able to use advanced trading strategies and tactics like hedging.
- Low minimum amount to start trading.
- International markets available from one CFD account, where you can trade shares, forex pairs, indices, commodities, sectors, etc.
- Trade directly on live tradable prices with no waiting for the execution of orders.
- You can participate in the opening and closing price auctions as every trade has a corresponding trade in the real market.
The best part?
24option platform is designed for ease of use, it is quick and easy to switch from CFDs to Forex trading without the need to open and close any windows on your computer.
They also offer trading with micro lots that go as low as 0.01 giving traders the opportunity to invest with lower risks.
The platform also comes with advanced tools such as risk management tools so that you can keep control and manage your account more effectively.
Especially with leverage, which might result in added gains should the market move in your favor.
But there is also a risk of increased losses if the position moves against you.