The market between CFDs and stocks leaves many prospect traders quite perplexed. Both serve their unique advantages, which might prove apt for a trader according to strategy, risk tolerance, and trading goals. If you are considering trading in CFD using online trading, you need to know the difference between CFD and stocks in terms of flexibility, risk, and potential rewards.

CFDs are a derivative product, meaning you trade the price movement of the underlying asset, not the actual asset. This means traders can go long or short without ever holding the actual asset. Among its virtues, online CFD trading gives traders access to a wide variety of markets including stocks, forex, commodities, and indices-all through one platform. This kind of account is pretty handy to the trader who wants to make money out of price movements from one market to another without having to manage many accounts or assets.

On the other hand, stocks are classes of ownership in a company. When you purchase stocks, you become a shareholder and enjoy the operations of the company and conditions of the market. Earnings reports and what the market thinks will affect stock prices. More so, stocks lead to dividends to the shareholders while waiting for the long-term benefits. Stock trading is relatively simple because you own the asset, and the focus falls upon the fundamentals of the company or its prospects for growth.

The leverage is one of the significant advantages of online CFD trading. Using CFD, a trader can control larger positions with a small initial investment. For example, if the leverage is 10:1, a trader can control a $10,000 position using only $1,000 in capital. Where this could give amplified profits, the risks equally run magnified. Where the market will go against you, losses are high in value. However, the risk associated with stock trading is usually much lower because you’re only risking what you’ve invested in the stock, and leverage is hardly ever used to the fullest.

CFDs also offer greater flexibility in market access. From both rising and falling markets, the trader can make money. For example, if you believe the price for oil will decline, you can sell short oil CFDs and, owing to the market trends, gain some amount from such a drop. In contrast, most types of stock trading are profitable only on an increase in price unless, of course, you are engaging in some more ‘technical’ short-selling, which might be very hazardous also.

Commissions or fees are charged on stock trading on every buy and sell order. If this is enough in frequency on the part of an individual trader, his costs can easily balloon over time. CFD brokers tend to be very competitive in spreads and do not typically charge commission on each trade. Financing cost, however, does accrue overnight for an open CFD position, which is normally deducted from profits unless that particular trading activity is closely monitored and controlled.

This strategy is also long term in trading in the stock market where most of the investors hold a stock for years. Short term traders often treat CFD as day trading and swing trading. Thus, it suits traders who wish to make profit from a shorter term price action.

There are different benefits to both sides but are suitable for different types of traders. If you are looking for flexibility, leverage, and access to the range markets, possibly, online CFD trading will be the best option for you. But if you are looking at stability and long-term growth, probably you will find a more fitting method through stock trading. Knowing these main differences will help you get to the right approach to your trading strategy.