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Investing in stock vs. CFD Trading

These days it seems that more and more people are trading or investing, either as a secondary source of income or on a professional level. This might be something that interests you and if it is, it’s a good idea to understand the ins and outs of the investment world before you get involved.

Specifically, it could be worth looking at two of the major forms of trading, contracts for difference (CFD) and stock investment. We’ll start by examining the more traditional form of investment.

Investing in stock

Stock investment is all about trading in shares, which are the basic unit of account for various investments. Usually when we talk about shares, we’re referring to the stock of a corporation, which means that if you buy a share you’re actually buying a piece of that company.

The reason that companies issue shares is to raise money, and this is done in a process called an initial public offering (IPO).

Traders can buy or sell shares, which rise and fall in value depending on the perceived market value of the company. More established companies can also pay a dividend to shareholders, which is another way of making a profit from share trading.

Why invest in stock?

Trading in shares can bring you, as an investor, a number of benefits, especially if you are prepared to research new markets and really do your homework when it comes to finding out which companies are growing. Just some of the advantages of stock trading include:

• Liquidity, in that shares are usually easy to buy or sell due to the volumes of trade which take place;
• Underlying value, in that shares represent ownership of a company and so can represent a good long-term investment;
• Transparency, as the value of a share is usually standardised and set according to the market.

CFD trading

A contract for difference is an instrument that is based on an underlying asset, such as a share.

In other words, it involves the trading of an asset rather than the asset itself. And it allows you to make profits and losses in relation to the position you have taken. In order to take advantage of CFD trading you should use a reliable online broker.

You also should have a fairly high level of understanding of the market in which you are planning to trade.

Why choose CFD trading?

For traders who would like to choose CFD trading as part of their investment strategy, it brings with it advantages such as:

• Going short or long, allowing you to make a profit even if the underlying asset loses value;
• Leveraging, giving you the opportunity to amplify your profits (or losses);
• Lower fees, because you are not actually buying any assets.

Stock investment and CFD trading are both forms of investment worth investigating, and we hope that this guide gives you some idea of their relative merits.

Featured image: FirmBee via Pixabay (CC0 Creative Commons)

Author Bio

Utility Media
UMS is a dedicated organisation to providing specialist and engaging content. Founded by Ben Barlow in 2011, Ben Barlow is a freelance finance writer specialising in stocks and shares, forex and ISAs. After studying business at Edinburgh University, Scotland, Ben worked at a number of financial institutions in London... More