When it comes to trading, there are many options available, including traditional trading and trading through Contracts for Difference (CFD). Both methods have their advantages and disadvantages, but it’s important to understand the fundamental differences between the two before deciding which route to take.
First, let’s define what each method is:
Traditional trading involves buying an asset in the hope that its value will increase over time, so you can sell it for a profit. The asset could be anything from a stock, commodity, or currency. Generally, you would purchase the asset through a broker or financial institution and hold onto it for a specific period, hoping that its value increases. Once you believe you’ve made enough profit, you’ll sell the asset to lock in your gains.
CFD trading, on the other hand, is slightly different. Instead of purchasing the asset itself, a CFD trader agrees to exchange the difference in value of the asset between the opening and closing trades. You never actually own the underlying asset – instead, you’re gambling on the direction it will take.View details here.
Now, let’s look at the main differences between the two:
CFD trading offers higher leverage than traditional trading. Leverage allows the trader to control larger positions with smaller amounts of capital. For example, a trader with $5,000 could take a position of up to $50,000 in CFD trading.
Traditional trading, on the other hand, generally requires the trader to put up more capital for larger positions.
While leverage can be helpful in generating larger returns, it also increases the risk of losses. Since CFD trading only requires a small percentage of the total value to be held on account, the potential loss can be much larger than the initial investment.
Traditional traders can limit their risk by setting stop-losses. Stop-losses automatically sell the asset if it falls to a certain price, ensuring the trader never loses more than they’re willing to accept.
CFD trading often has extended trading hours. You can trade 24 hours a day, five days a week. This is because CFDs are traded on margin, which allows them to be traded from anywhere in the world, at any time.
Traditional trading is also available round-the-clock, but only for certain markets. For example, the currency market is open around the clock, while the stock market is typically open from 9:30 AM to 4:00 PM EST.
CFD trading can have lower fees than traditional trading. Instead of a commission fee charged by traditional brokers, CFD traders pay a spread fee. This is the difference between the buying and selling price of the CFD.
Traditional trading may have additional fees, such as account maintenance fees, broker-assisted trading fees, and other account-related costs.
A margin call happens when the trader’s account balance drops below the required margin level. In CFD trading, the margin call can result in the trader’s position being closed automatically by the broker.
In traditional trading, margin calls are less common since the trader is required to hold the full value of the investment. In this case, the trader is responsible for monitoring their positions for the need to add additional funds.
Traditional trading is a more conservative approach to investing, while CFD trading offers more leverage and flexibility. Both methods have their own risks and potential rewards. Understanding the key differences between the two can help you make a more informed decision when trying to decide which method is right for you.
Remember, it’s important to do your research and seek out professional advice before making any investment decisions. Start by opening a demo account to practice CFD trading or signing up with a reputable traditional broker.