Both CFDs and investing offer one thing in common. They both provide the trader or investor a platform of profiting from price movements in the markets. Many people who participated between these two either ended up very successful and rich or if not done right, suffered capital loss over time. Which is better? You’ll know after reading this article.
What is CFD Trading?
A contract for difference (CFD) is a leveraged economic arrangement in which one party purchases another’s asset with the expectation of a higher price at the time of purchase. As the name implies, it entails purchasing assets with funds borrowed from a third party—in this case, a financial institution. In practice, the buyer pays cash for the asset (or an equivalent instrument). When the transaction is made, the difference is invested in another company to earn interest. While the details and conditions of the deals may fluctuate, the basic premise is that two parties exchange cash for an asset, with some of that cash being invested.
Example of CFD Trading:
If you want to buy 1,000 unit Apple shares at today’s market price, you would need to deposit 5% of the value into an account at ABC. You would then need to wait 24 hours before trading again. Here’s how it works: If you buy Apple at X price, your broker will sell your share at that price to another party. If a second party sells their Apple at a higher price, your broker has to pay the difference – which could be a lot depending on where the shares are traded.
Here’s another one:
In two months, Apple shot up 30%. You invested £500 and gained £3,000 by trading. But if prices had dropped 30% then your loss would have been £2,000 – 30% of £5,000 = £1,500 – (30% – 5% =) £900. This is why it is important to understand how to analyze charts and read price action when using CFDs properly.
What is Investing (Share Trading?)
Share trading occurs when an investor purchases a specific number of shares and has them pegged to the underlying asset’s value. You put money into a company and get the right to vote on what the company does. This lets them take their time in making investment decisions. The best type of shares for this type of investment is called Class A shares. They have the highest voting power and are available for purchase at any time on the secondary market. Class A shares generally give investors a return of 1 to 2 times their money — although some subsidies exist for specific investors.
Active and passive share trading are the two types of stock trading. To profit, an active share trader invests in fresh shares (or contracts) on an exchange. They don’t have to keep an eye on the price all the time, but they can make a lot of money when prices are about to rise. Their passive counterpart watches the market value of his shares rise and fall, then buys and sells in response, learning to read good and bad news signals and acting accordingly.
To summarize, both are great platforms to earn money, and after reading this short article, you should have a brief idea of which is better. CFDs? Or Investing? Either way knowing its brief definition should help you decide what to take and help you become a successful CFD trader or an investor.