Important Information

You are visiting the international Vantage Markets website, distinct from the website operated by Vantage Global Prime LLP
( www.vantagemarkets.co.uk ) which is regulated by the Financial Conduct Authority ("FCA").

This website is managed by Vantage Markets' international entities, and it's important to emphasise that they are not subject to regulation by the FCA in the UK. Therefore, you must understand that you will not have the FCA’s protection when investing through this website – for example:

  • You will not be guaranteed Negative Balance Protection
  • You will not be protected by FCA’s leverage restrictions
  • You will not have the right to settle disputes via the Financial Ombudsman Service (FOS)
  • You will not be protected by Financial Services Compensation Scheme (FSCS)
  • Any monies deposited will not be afforded the protection required under the FCA Client Assets Sourcebook. The level of protection for your funds will be determined by the regulations of the relevant local regulator.

If you would like to proceed and visit this website, you acknowledge and confirm the following:

  • 1.The website is owned by Vantage Markets' international entities and not by Vantage Global Prime LLP, which is regulated by the FCA.
  • 2.Vantage Global Limited, or any of the Vantage Markets international entities, are neither based in the UK nor licensed by the FCA.
  • 3.You are accessing the website at your own initiative and have not been solicited by Vantage Global Limited in any way.
  • 4.Investing through this website does not grant you the protections provided by the FCA.
  • 5.Should you choose to invest through this website or with any of the international Vantage Markets entities, you will be subject to the rules and regulations of the relevant international regulatory authorities, not the FCA.

Vantage wants to make it clear that we are duly licensed and authorised to offer the services and financial derivative products listed on our website. Individuals accessing this website and registering a trading account do so entirely of their own volition and without prior solicitation.

By confirming your decision to proceed with entering the website, you hereby affirm that this decision was solely initiated by you, and no solicitation has been made by any Vantage entity.

I confirm my intention to proceed and enter this website Please direct me to the website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom

By providing your email and proceeding to create an account on this website, you acknowledge that you will be opening an account with Vantage Global Limited, regulated by the Vanuatu Financial Services Commission (VFSC), and not the UK Financial Conduct Authority (FCA).

    Please tick all to proceed

  • Please tick the checkbox to proceed
  • Please tick the checkbox to proceed
Proceed Please direct me to website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom.

×

Watch Reborn a Trader

row

View More
SEARCH
  • All
    Trading
    Platforms
    Academy
    Analysis
    Promotions
    About
  • Search
Keywords
  • Forex Trading
  • Vantage Rewards
  • Spreads
  • facebook
  • instagram
  • twitter
  • linkedin
  • youtube
  • telegram
CFDs vs Stocks: Differences, Similarities, and Which to Choose?

TABLE OF CONTENTS

CFDs vs Stocks: Differences, Similarities, and Which to Choose?

CFDs vs Stocks: Differences, Similarities, and Which to Choose?

Vantage Updated Updated Thu, 2023 November 9 08:30

In the financial markets, there is a plethora of financial products that can be traded. Given the right conditions, trading each one of the products can have the potential to create trading opportunities. But in the world of plentiful choices, it is crucial to choose the product that is right for you. In this article, we will address the choices between CFDs and stocks.

Key Points

  • The US Non-Farm Payrolls report, or NFP for short is one of the most closely watched economic indicators in the world.
  • NFPs are important as policymakers at the Federal Reserve will use all the available data to analyse the current state of the economy.
  • NFP data release can cause significant price action in forex and trading, with the market’s reaction depending largely on how the actual figures compare to analysts’ expectations rather than the absolute numbers

CFDs vs Stocks: Which One Suits You?

CFDs can be an option to trade if:

  • You use a variety of trading styles based on market conditions
  • You like the flexibility and nimbleness to get in and out of markets
  • You are interested in trading in a variety of markets (stocks, forex, commodity, options, etc.)
  • You don’t care about potentially owning the underlying asset

Stocks can be an alternative choice to trade if:

  • You not only want to create trading opportunities for potential gains (which comes with the risk of losses), but you also want to participate in equity growth through ownership and control of the company
  • You would like to be entitled to dividends given out by the company
  • You have access to a much larger pool of capital

Similarities Between CFDs and Stocks

  1. Both Allow You to Take Advantage of Price Movements

    1. A Contract for Difference (CFD) allows traders the opportunity to take advantage of the falling and rising prices of underlying financial assets (the underlying).[1
    2. A stock also allows both traders and investors to take advantage of the price movement of the shares.

Differences Between CFDs and Stocks

CFDsStocks (also referred to as shares)
Flexible trading styleCan work for any trading style (scalping, day-trading, swing-trading)Best suited for swing traders and investors who are interested in the ownership of shares. Pattern Day Trading (PDT) rule applies to US traders
Short sellingStraight-forward procedureNeed to borrow shares from your broker
Transaction costsSpreads and swapsBrokerage commission
Leveraged productLeverage is built inNeed to have a margin account, not a cash account, to get margin
Derivative productA derivative product with flexible underlyingNot a derivative product

Table 1: Differences between CFDs and stocks
  1. CFDs Allow Flexible Trading Styles Without PDT Rule

    1. Are you a day-trader, scalper, or swing dealer? Do you primarily follow one pattern, or are you sometimes inclined to vary how long you stay in your positions based on what the market outlook is? CFDs can provide you with maximum trade flexibility for your preferred trading style.[2]
    2. Contrast this with the situation in which you’re purchasing stocks. Yours or your broker’s jurisdiction will determine whether or not your broker is actively day trading stocks. If so, you will be subject to Pattern Day Trading (PDT) rules for each margin account that you are actively day trading stocks. This could make it challenging for small accounts.[3]
  2. CFDs Enable Short-selling

    1. Traders can short a CFD position to possibly take advantage of falling markets. For example, you wish to trade Intel’s shares through CFDs at $2,060. You decided to take the short side of the trade for 50 contracts and will close the position as soon as the share price reaches $1,750 per share. This trade can potentially make a $250 profit since ($2,060-$1,750)*50 = $15,500. (This example is provided for illustration purposes only).
    2. The owner of the stock always has a long position.
    3. Stock traders who want to sell short are required to borrow shares from the broker. You then sell those and repurchase them later at a lower rate to take advantage of the falling markets. However, it can be difficult to borrow, especially for thinly traded stocks. [4]
    4. It should be noted that when it comes to retail stock trading, borrowing shares from the broker is necessary. Selling short without first borrowing the stock, or at least first determining that it can be borrowed, is referred to as naked shorting – an illegal practice, as it can potentially lead to a failure to deliver. [5]
  3. Transaction and Financing Costs

    1. When trading CFDs, you incur transaction costs (fixed-ticket, bid-ask spread, or spread plus a small commission for direct market access, depending on your provider and your account type), as well as overnight swap fees. When trading options, you only pay the broker commissions. [6]
  4. CFDs are Leveraged Products

    1. CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the position in order to open a position – you will be trading on margin, which is the amount of money you need to open a position. Margin trading gives you full exposure to the market while using only a small fraction of the capital otherwise needed.
    2. Leveraged trading can work well for those trading short-term price movements due to the cost of borrowing, whereas it would not be primarily preferred e for anyone investing long-term. [7]
    3. Stock trading has two types of accounts: cash and margin accounts. Cash accounts will give you no margin. On a margin account, however, you borrow money from the broker using the securities in your brokerage account as collateral. As with any loan, you need to meet the maintenance requirements, which vary from broker to broker.
  5. CFDs are Derivative Products

    1. A CFD allows traders to take advantage of the falling and rising prices of underlying financial assets (the underlying). The fact that CFDs are derivative products means that they have a large variety of underlying such as stocks, commodities, forex, precious metals, and even options contracts. The price of the CFD is driven by the price of the underlying. [8]
    2. When the contract ends, the trader and the broker exchange the difference between a specific asset’s opening and closing prices. The trades can result in either a profit or a loss, depending on the direction that you have chosen.
    3. A stock is not a derivative product. It represents a fraction of the publicly listed company, and the buyer of the stock owns a fraction of the company. A stock’s price, therefore, represents the company’s market value.

Conclusion

In conclusion, for short-term private investors who are not interested in holding an investment for the long term, CFDs can be a  way of creating trading opportunities from the price movements. By leveraging CFDs, investors can take advantage of market opportunities. If you tend to hold trades for a longer time frame that is greater than four to six weeks, and are interested in sharing the control of the company, stocks may be a good choice for you.

References

  1.  “An Introduction to Contract for Differences (CFDs) – Investopedia.” https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp. Accessed 7 Apr. 2022.
  2.  “What Type of Trader Are You? – Investopedia.” https://www.investopedia.com/articles/investing/052413/what-type-trader-are-you.asp. Accessed 8 Apr. 2022.
  3.  “Pattern day trader – Wikipedia.” https://en.wikipedia.org/wiki/Pattern_day_trader. Accessed 8 Apr. 2022.
  4.  “Short Selling – Corporate Finance Institute.” https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/short-selling/. Accessed 8 Apr. 2022.
  5.  “The Truth About Naked Short Selling – Investopedia” https://www.investopedia.com/articles/optioninvestor/09/naked-short-selling.asp. Accessed 13 Apr. 2022.
  6.  “How CFD Pricing Works | Contracts-For-Difference.com.” https://www.contracts-for-difference.com/cfds-pricing.html. Accessed 8 Apr. 2022.
  7.  “Leverage – Guide, Examples, Formula for Financial & Operating ….” https://corporatefinanceinstitute.com/resources/knowledge/finance/leverage/. Accessed 8 Apr. 2022.
  8.  “The underlying assets of CFDs – Forex-Central.net.” http://www.forex-central.net/cfd-underlying-assets.php. Accessed 8 Apr. 2022.
  • vantage academy open account

    Open Trading Account

    Discover the endless trading possibilities with our cutting-edge platform, designed to empower both beginners and seasoned traders alike.

  • vantage academy app

    Download Vantage App

    Trade on the go with the Vantage All-In-One Trading App, where smooth execution and market access come together in the palm of your hand.

  • vantage academy start trading

    Start Trading

    Are you an existing user? Login to your account to start trading 1,000+ products including forex, indices, gold, shares and more.