Thursday 03 October 2024
What Are the Differences Between CFD and Share Trading?
Now that Plus500 offers both CFD trading and the Invest trading platform, you’ll need to decide which method best suits your trading objectives.
First, let’s find out how CFD and share trading differ. The main differences between CFD and share trading are that when you trade CFDs you take into account: leverage and margin, fees and charges, instrument categories, going short, and asset ownership. Let’s explain a little further…
What is Leverage and Margin?
When trading CFDs, leverage and margin go hand in hand. Leverage allows you to gain exposure to an underlying asset without having to put down the whole amount of capital required to buy and own the actual asset, but rather, only a percentage of the total value of your position. Margin is not a fee, but rather a minimum amount that you must initially have available to open a position which varies depending on the contract size and the underlying asset you wish to trade. The initial margin requirement is the percentage of the contract value and is based on the pre-set leverage for the asset class. Trading on margin entails a higher level of risk.
When you trade on the Invest trading platform, you Buy shares without leverage applied to your available cash and you must have the total value of an asset available.
Variety of Assets
On the CFD platform with Plus500, you can trade on a variety of over 2,500 assets including Shares, Forex, Commodities, Indices, Cryptocurrencies, ETFs and Options. This allows you to diversify your portfolio and gain exposure from the world's leading exchanges.
The Invest trading platform is a platform that allows you to trade stocks and exchange-traded funds (ETFs). You have access to over 1200 stocks and 90 ETFs, so you can buy and hold shares from your favourite companies or any listed ETF on the platform, as well as take advantage of the newest IPOs when companies go public.
Going Short
As opposed to the Invest trading platform, where you usually have to first buy the asset to be able to sell it later, CFDs allow you to open a Sell position at a specific price, with the intention of closing it at a lower price, thus potentially profiting from a drop in an instrument's price (or losing if the price rises).
Asset Ownership
A CFD can allow you to gain exposure to an underlying asset such as Gold (XAU), Apple (AAPL) Stock, or EUR/USD, without owning it. You will make gains or incur losses as a result of price movements in the underlying asset. The objective of CFD trading is to speculate on the price movements of an underlying asset. Any profit or loss depends on position size and price movements.
Whereas buying a stock on the Invest trading platform, you own the physical asset and seek a potentially longer-term increase of the asset value, in order to sell it.
A Little More About How CFDs Can Differ From Investing:
When trading CFDs, if your position is still open overnight, you will incur an overnight fee.
Stock trading is usually preferred for building portfolios, whereas CFD trading is generally used to speculate on short-term events such as earnings releases or U.S. data report publications.
In general, both CFD and stock trading have advantages and disadvantages, and both allow you to take advantage of price movements that may incur either profit or loss. Once you understand your trading objectives, you should be able to decide which Plus500 platform best suits your trading preferences. So, which platform suits you, the CFD or Invest trading platform?
