This is one of the most common questions we see new traders ask, and really, there are two answers, depending on which kind of share trading you’re talking about.
When you trade shares, you profit or lose money based on whether the share price goes up or down. You can go short or long on the position, depending on if you believe the price will move up or down.
Both of these things are true of shares CFDs, too.
However, the main difference with CFDs – and this is where people get confused – is that with a CFD trade, you don’t actually own the shares.
You’re simply ‘speculating’ on whether the price will go up or down.
The other key difference is that CFD traders usually make use of leverage. (Which we’ll cover in more depth in a moment.)
This is down to your own financial goals, and we’d never give direct advice.
What we can do is go through the pros and cons of CFDs versus traditional share trading.
If you use leverage, then yes. Leverage magnifies your chance at larger profits, but it also increases your risk, and opens up the possibility that you could lose more than you trade with.
Let’s go through a quick example trade to show you what we mean:
You decide to open a trade worth $10,000 on Company A’s share price.
You use leverage of 1:20, which means you are only required to supply $500 of real money upfront.
Your profits and losses are calculated on the full value of the trade, not on your capital.
So, in this case, your profit is calculated on the $10,000.
Let’s say you make a 20% profit of $2,000.
You only actually supplied $500 of capital. So, even though the profit on the trade is 20%, your profit in monetary terms is 100%. (You’ve doubled your money.)
This is why leverage can be popular with traders. However, the same principle applies to any losses, too.
So, if you’d lost 20% on the trade, your losses would have been $2,000. In other words, you’d have lost double what you put in.
The more leverage you use, the more potential for a larger return, but also the more potential for losing substantially more money than you traded with.
Understandably, many traders choose to avoid using leverage entirely, because they simply aren’t comfortable with the idea of losing more than they put in.
Whether you choose to use leverage is down to your own appetite for risk and what your financial resources are.
As always, you should never trade with money you can’t afford to lose.
The 2 key differences between CFDs and more traditional share trading are:
Though there are other key differences, such as trading hours, associate costs and shareholder rights.
Whether you use CFDs or stick with traditional shares is largely down to your own appetite for risk and how much capital you have to trade with.
Never trade with more money than you can afford to lose.
Risk Warning and Disclaimer: This article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform. Trading Contracts for Difference (CFDs) involves high leverage and significant risks. Before making any trading decisions, we recommend consulting a professional financial advisor to assess your financial situation and risk tolerance. Any trading decisions based on this article are at your own risk.
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