Very often, investors find it difficult to distinguish between stock trading and CFD trading. Notwithstanding the fact that some stocks can also be traded as CFDs, that does not undermine the fact that stock trading is different from CFD trading. Stock trading, from its inception, has been designed to allow individuals to partake in the ownership of a company by buying its shares. It was only recently that the online stock brokers included stocks in their platforms to be traded as CFDs too. This work will therefore help you understand the difference between stock trading and CFD trading. You will also learn from this work the similarities between stock trading and CFD trading to guide you in making decisions.
What is stock trading?
Stock trading is an investment package that allows individuals and other corporate bodies to participate in the ownership of a company by purchasing its stocks listed on the stock exchange market. Stock trading offers the holders of the company’s shares a legal claim over the company’s dividend based on the agreements reached when the stocks were purchased.
How does the stock market operate?
The stock market, also known as the equity market, is an avenue that makes it possible for companies to raise money to run their business. Often companies seeking to grow and expand their business but do not have the capital usually utilize selling their shares to the public as an avenue to raise money to run the company. Here, such companies tend to divide themselves into units that can be purchased by the public through an initial public offering (IPO). They list their company stocks on the stock exchange market for investors to purchase.
Next stock traders proceed to the stock exchange market or other stock trading platforms to purchase the company’s stocks that have been listed for trading.
Afterward, they hold these stocks over time till their price appreciates before they can sell off again. Some blue chip companies offer their shareholders dividends, too, for investing in the company’s shares. This becomes an added advantage to investors when they purchase such stocks. Every country has its official stock exchange market. Hence, we have the London Stock Exchange, New York Stock Exchange, Hong Kong Stock Exchange, National Stock Exchange of India, etc.
What is CFD trading?
CFD trading is a leveraged form of trading that allows traders to speculate on the future prices of various financial instruments and profit from their price variations without possessing real assets. The term CFD is an acronym for ‘Contract for difference.’ This means there is no legal ownership of the underlying assets traded as CFDs. Virtually all financial instruments, including stocks, can be traded as CFDs today. However, an important point to note here is that trading stocks as CFDs is quite different from the traditional form of stock trading that offers investors legal ownership of the company’s shares.
The major difference between stock trading and CFD trading
| Stock Trading | CFD trading |
|---|---|
| Offers investors a legal owner of the shares purchased. | No legal ownership of assets purchased. |
| Traders hope to benefit when the prices of the assets appreciate. | Highly speculative. |
| Offers dividends to investors | No dividend is offered to investors. |
| Does not involve leverage | Leverage is offered for trading. |
| Does not support hedging | Supports hedging as traders can either long or short the market. |
Similarities between stock trading and CFD trading
- Offers exposure to the financial market.
- Both involve risk.
- They provide means for investors to diversify their portfolios.
- There is no guarantee for profits.
- Both serve as an investment package.
