Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

Should You Invest In CFDs Or Stocks To Make More Money?

Author: Martin Moni
Martin Moni
All publications of the author

There are only two ways of trading the stock market – directly at an exchange, or as a CFD (contract for difference). Buying and selling stocks directly at an exchange is not as simple as walking into a shop and walking out. You will need a broker who will enter your order at the trading floor. Sometimes even the broker must also make use of another broker, but all that has been explained in another post. The point is, you cannot buy stocks yourself, but in the end you will own the stocks you bought. (Buy stocks by learning: How to trade on the NYSE)

On the other hand are CFDs, and these are just instruments for tracking the value and performance of a stock. They can also track bonds, ETFs, commodities, etc., but in this case we’re only looking at CFDs for stocks. CFDs are provided by a CFD provider who is usually a broker, especially the top Forex brokers. Anyway, with a CFD, the exact performance of the underlying stock is transferred, making it just as good as holding the actual stock. However, both of these investment options have their benefits and downsides. If you’re going to buy stocks one way or another, then you first need to weigh what each of these avenues provides. (How about: Comparing fundamental and technical analysis)

In favour of conventional stock trading

All stocks are traded through an exchange, and as already mentioned, you would need a broker to do so. Stock trading has been around for centuries, which makes it the oldest form of investment and also very profitable. There are reasons why the industry has stood the test of time, and these include: (Begin by learning the: Basics of stock trading)

Annual dividends

When you own a company’s shares after buying them from an exchange, you become an actual stakeholder who is eligible to the company’s annual dividends. The dividends are a portion of a company’s profits after taxes and are distributed annually among all investors. These are usually negligible, but they are a good bonus to the investment. Besides, with a big enough investment, these dividends can add up to good money every year. For example, Playtech PLC paid out $0.30 per share. While that may be small, at around $10 per share, a shareholder with a lot of shares could earn a lot every year. Furthermore, these annual dividends may rise in every subsequent year providing a good passive income to shareholders. Some other situations like mergers and acquisitions can also mean profits to shareholders. Take the recent acquisition of Time Warner by AT&T where every Time Warner shareholder got $53.75 per share as well as 1.4 shares in AT&T. (Everyone should be thinking about: Investing for the future)

On the other hand, CFDs do not provide any dividends, and you may even be charged for overnight and weekend swaps. Moreover, the swaps for such CFDs can be higher than those charged for traders holding, say, Forex pairs. That means stocks have the advantage of providing actual annual returns while CFDs end up costing you more. (Some of the: Alternative Cryptocurrencies beside Bitcoin to invest in)

Actual ownership

While you own a company’s shares, those become part of your assets, just like your house or car. Therefore, you can use your shares certificate to, say, take a loan at the bank or even get a mortgage. CFDs on the other hand are virtual and cannot be used for any other purpose. Being yours, you can also choose to sell your shares on the open market if you choose to at, say, an options market. (Do you know: Which Are The Most Influential Cryptocurrency Markets By Country?)

Assume, for example, that you owned 1,000 shares of Apple right before the launch of a new iPhone model. You believe that Apple’s share price will spike from the sales of the new iPhone, so you use options to earn from the move. The stock is currently trading at $180 and you think this could spike to $200 in a month, so you use a call option to earn some extra income from the move. Therefore, you sell your call option to a broker at a strike price above $200; perhaps $210. You will first earn from the premium charged for each option and are free to set this. Then your hunch becomes true and Apple’s shares rise after the launch of the new iPhone, but not to the $210 strike price. This would make the option unappealing to the broker, so you keep your stocks, benefit from the spike in value and earn extra from the premium. Of course, you could have lost had the shares risen beyond $210, but this was a calculated risk. (This is all you need to know about: How to create a trading strategy)

What we see from the above example is that, since you own the actual shares of a company, you are free to do with them as you wish. This luxury is not available to traders who are buying stock through CFDs since it is a derived product and they don’t actually own the stock. This advantage can be utilized in myriad other ways, making actual stock ownership more beneficial. (To become rich from Forex trading, follow these: 10 steps of successful traders)

Security

Stocks are much more secure because the brokers who offer them are usually reputable and licensed. Assume that you wanted to buy some stock, then you would most probably look for a broker with a good reputation an history. CFD providers too are supposed to be licensed and trusted, but many of them aren’t. Of the thousands of Forex brokers available today, only a fraction of them are actually licensed and regulated, which leaves the industry open to fraudsters and scammers. Sure, there have been scams in the stock market too, but these are rare because people tend to buy stocks from credible sources. (These are: The 3 Most Trusted Exchange Authorities in The World)

Besides, what recourse can you take against a CFD provider located in a foreign country? Most CFD brokers are located in European countries, meaning that residents of other countries may have a very difficult time recovering their money in the case of fraud; even with the help of authorities. As for stocks, though, the certificate of ownership does not even need the backing of a broker as it is enough on its own. This means that there are minimal chances of fraud and that the investment is a lot safer. (This is: How to complain against a broker)

Why it’s better to buy CFDs instead of stocks

The other alternative besides actual stocks is to buy the same as CFDs instead. CFDs are a derivative product that merely track the value of the underlying stock. For example, there can be CFDs for Apple stock, which upon buying mimic the same price movements of the stock without actually owning the stock. If you compare CFD brokers, you will find that there are many financial products that can be tracked using CFDs. There are several reasons why CFDs have arisen as an alternative to investing, and these include: (Do you know: How Is Spread Betting Different From Forex Trading?)

CFDs are cheaper than stocks

To buy a company’s stock, you must provide the exact value of the stock in full. Some company shares can be very expensive for the average trader, which locks out a lot of people from access. Take, Berkshire Hathaway perhaps, whose shares trade at $287,600 apiece at current market value. How many people could acquire several shares of that particular stock? Besides, exchanges usually dictate a minimum number of shares that can be bought. For example, if the minimum number of shares is 100 at $20 each, you must fork out $2,000. Remember that this does not include other additional charges imposed by the broker for their service and the taxes you will have to pay afterwards. (This is: A Complete Guide To Volume Spread Analysis In Forex Trading)

With CFDs, though, the CFD provider can offer leverage, and this can be as high as 1:50, sometimes even 1:100. That means that you could buy the same 100 shares above worth of CFDs at just $40 or $20 depending on the leverage offered instead of the $2,000 required for stocks. Not only is this cheaper to afford, but it also allows you to buy more and subsequently earn more. What’s more, since the performance is matched precisely, the returns can be even more than those enjoyed with an actual stock. Consider this, what if the stock worth $20 rose in value to $25. The trader who bought 100 shares with $2,000 will be up $500 (($25 x 100) - $2,000). Had the same capital been invested in buying CFDs, the trader would have acquired the equivalent of 500 shares at a leverage of 1:50. Consequently, the profit would be $2,500 ($5 x 500). That is definitely a much higher return. (Have you ever wondered: Can A Forex Broker Avoid Sending Trades Directly To The Interbank Market?)

CFDs are easier to access

Shares can only be purchased at an exchange by a broker, and even they cannot have access to all the exchanges around the world. A broker in, say, China, may not have access to the Johannesburg Stock Exchange, and they won’t be able to get you the shares offered there. When you’re dealing with a CFDs broker instead, they don’t need actual access to the exchange, just the value of the stock you need. Therefore, a CFDs provider can have access to as many stocks as they want. (These are the: Concepts Every Trader Should Understand: Leverage, Margin And Hedging)

Which of the two is your best option?

From the above arguments, you can see that both CFDs and stocks each have their own merits and demerits. These are what you need to consider so that you can choose your best option. It really comes down to your intention for investing and your expectations thereafter. The first kind of buyer is that who intends to invest for the long-term in order to conserve wealth and earn passive income. This kind of buyer is more suited to buying stocks because they are usually a safe bet over the years. The only caveat to buying stocks is making the right decision initially. Most stocks on prestigious exchanges like the NYSE grow in value over the years, but there are still some that collapse, especially penny stocks. Accordingly, stocks will hardly fail you as long as you pick the right company. (Are you wondering: Who Are The Best Forex Social Trading Brokers To Work With?)

Moreover, stocks are less risky because they don’t use leverage, which can be a double-edged sword. In the above example where the trader made $2,500 through CFDs, this trader could have lost just as much had the stock dropped in value. Due to leverage, all the losses incurred are deducted from your margin, which is why CFD brokers always warn traders that ‘losses can exceed initial investment’. (What Is The Financial Commission And Can It Be Trusted?)

For a speculative trader, though, one only interested in making a profit just from the price changes, CFDs are definitely the way to go. The use of leverage means that such a trader can make quick and large profits even from small price changes, allowing them to make numerous trades and accumulating profits. So long as the trader is experienced and careful not to overextend the risks, it is possible to make a good sum of money through CFDs. (Tips on: Risk-management in Forex)

There you have it now, for anyone who needed to know which between CFDs and stocks is more profitable. The key is to know what you want and your level of experience and expertise in stock markets.

 

Many experts discuss both CFDs and stocks and their benefits, listen to what one has to say about it:

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.
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