What are the differences between share trading and CFD trading?
The key difference between share and CFD trading is that with CFD trading, you don’t own any aspect of the underlying financial instrument itself. You are forming a contract between yourself and your CFD broker – in this case, ForexCT. When trading CFDs you can make a profit if the market moves in your favour, whether that prediction is that the price will move up or down. CFD trading also gives you the opportunity to trade on a wider range of financial instruments, including commodities, currencies, indices and shares, on various markets that are open at different times of day. Share trading, on the other hand, involves the purchase of equity securities.
Another major difference is that CFD trading enables traders to open larger positions than their own account would typically allow by using leverage. The trader’s required margin may only be 1% or 0.5% of the trade position, with the rest of the position being temporarily provided by the broker. Depending on the amount of leverage and the trader’s decisions, the resulting return or loss can be much greater than would be obtainable without leverage.
Are there risks to trading CFDs?
As with any form of trading, there are some risks involved. For CFD trading, leverage can bring some risk because it can amplify both profit and loss. Traders can minimise risk by placing stop losses on their trades, limiting the size of each trade and opting for lower levels of leverage.
Which option is best for me?
This will depend on your trading strategies, your amount of capital, your risk profile and the hours you have available to monitor your chosen markets. CFD trading may be for you if you are looking for a wide range of trading opportunities, wish to trade outside normal trading hours and would like to be able to speculate on prices as they fall and rise. You can begin with a free demo account with ForexCT to decide whether CFD trading is right for you, or sign up for a live account.