While there are many different brokerages in today's ever-growing financial markets, every broker presents unique offerings limited to specific needs.
To fully understand the difference between CFD and traditional stock trading, it is necessary to note the distinction between trading and investing itself. While investing prioritizes long-term gains, stock trading is a form of investing favoring short-term profits instead.
Thus, without proper knowledge, stock trading can be risky.
Traditional stock Trading
Traditional stock trading provides individual ownership over an actual share of a company including, a claim on the company's earnings and assets. As such, stockholders are partial owners of the company.
Though some companies sell stocks directly to investors, most only sell through a brokerage. Therefore, Online Brokerage firms serve as an intermediary for investors and traders to buy and sell stocks electronically through different stock exchanges like the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
Usually, it is recommended that investors build a well-diversified portfolio of stocks with long-term investment in mind, but for the more experienced investor, engaging in frequent buying and selling of stocks attempting to 'time the market' may deem more fruitful.
The main goal of stock traders is to capitalize on short-term market events to sell stocks for a profit or buy stocks at a low.
Stocks are a way for retail investors to own a share in some of the world's largest companies and considering that economic growth far outlasts economic downturns, it is possible to grow capital over a long period by investing in stocks.
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Contracts for differences (CFD)
CFD is an advanced trading strategy that is predominantly used by experienced traders.
As the name implies, a contract for differences is an over-the-counter derivative contract between two parties. It means that one party agrees to pay another party the difference in the value of a financial instrument from when a contract opens and closes.
Importantly, CFDs allow traders and investors to profit (or lose) from price movement without ever owning the underlying asset (basket of assets like stocks or options). The trading strategy essentially allows you to place bets whether the price of a stock or security will rise or fall, with traders betting on upward or downward movement.
Moreover, CFDs are traded using margin, which means you create exposure by trading stocks with leverage. Both profits and losses are therefore equally magnified.
CFD trading is highly speculative and volatile, with the risk of severe financial losses. In addition, CFD providers usually set their own rules, are not standardized and, do not actively inform investors that a stock or asset is never owned and instead receives revenue based on price changes.
To profitably engage in this market, careful analysis is needed. And while leverage can be lucrative if used well, it may be merely flattery for naive investors.
Conclusion
Many inexperienced traders will fare much better trading in blue-chip stocks. [A Blue-chip stock is a large company with an excellent reputation and upholds while typically well-established and financially sound, i.e. Apple Inc.]
And, while both CFD and traditional stock trading can be profitable, it is necessary to understand the difference between the two to pick the right one for your level of experience and style of trading.
MEXEM understands that broker’s commission may be the difference between success and failure with investments. That is why the company remains committed to a low commission structure and leading the way for lower fees in Global Markets.
To begin your investment journey visit MEXEM today.
