As the trading and investment niches have grown in popularity in the last few years, more individuals are beginning to see the opportunity in the different markets, assets, software, platforms and more out. When looking into the best ways to get involved, many find that they hit a stumbling block when choosing between trading and investing.
The Key Differences in Investing vs CFD Trading
With both investing and trading, individuals will speculate on the movement of an asset’s price with the intention of making a profit. The biggest difference is that investors will buy the asset and own it, whereas traders won’t, as they will be using derivative trading products like CFDs (contracts for difference) to undertake transactions.
CFD trading is considered an active endeavour, whereas investing is passive. What this means is that trading is often fast-paced and positions are taken more frequently, whereas investors are likely to buy an asset and hold onto it in the hopes of finding greater profits down the line.
CFDs are more flexible, as there are a host of markets available for trading, including Forex, indices, shares and commodities. As individuals don’t own the underlying asset, more positions can be taken on at any time. There is also the ability to go long or short with CFD trades, where traders can speculate on both price rises and drops to take full advantage of the market. Many find investing to be more restrictive, as funds will typically be dedicated to one asset and held until the right time to sell presents itself.
Alongside this, CFDs are free from stamp duty (but profits are subject to capital gains tax) and leverage can be used to maximise both trading and profit potential.
A Bit About Leveraging
An important consideration between CFD trading and investing is leveraging. For those who aren’t familiar, traders can work with brokers to go in on positions together, using a small deposit and borrowed money. Traders can put a margin of as little as 5% (depending on the requirements of the brokerage) to enter a full position and will take full profits or losses that the trade incurs (in the case of the latter, this can be a pitfall, as you will lose more than you put in). When investing, this isn’t possible and you will be required to pay the full amount yourself upfront.
Spread betting is another financial derivative that uses leveraging, and you can find out more about it here.
Trading with leverage comes with risk, it’s essential to carry out research on the markets and the trading platform you’re looking to use before placing any live trades. Further risk management tools such as stop losses can be useful to mitigate the potential of large losses.
The Pros And Cons of CFD Trading
- Relatively low costs
- Extensive options
- Costs are proportionate to exposure
- Options to go short or long
- Financing costs make long-term endeavours difficult
- Psychological pressure
- Traders don’t own the underlying asset
Pros And Cons of Investing
- Investments in shares can grow with the economy
- Income from price appreciation and dividends
- Investors will often have the opportunity to vote on company policies and more
- Investing takes time to research
- Taxes need to be considered
- Investors are limited to stocks and Exchange Traded Funds (ETFs)
Which is Best CFD Trading or Investing?
There is no right or wrong answer when deciding if CFD trading or investing is best. Both have their advantages and disadvantages, so ultimately, your decision should be made considering your own personal goals.
You may want to take your experience in the financial markets into consideration, as investing can be more difficult than trading. Jumping in with investments could have an impact on your overall success and cost you more in the long run than starting off with demo trading and taking up small CFD positions until you grow your confidence. If you do some research into both and see what aligns best with your needs, budget and aims, you’ll get a better understanding of where to begin. With this in mind, it can be worthwhile to visit fca.org.uk for important UK-specific regulatory information.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation. Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.