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How trading CFDs differs from investing in shares

by , 10 June 2015

If you're thinking about trading contracts for difference (CFDs), you may be wondering how they differ from investing in shares.

There are a number of differences. And it's vital you understand these differences before trading CFDs.

Let's take a closer look at what these differences are…

CFDs versus shares difference #1: Risk

The risk of trading CFDs is much greater than investing in shares.

When you buy shares, the most you can ever lose is the amount of money you invested. This is also unlikely to happen.

But with CFDs, you can lose what you put down in a trade and more.

The risk is greater with CFDs because they’re geared instruments. This gearing multiplies the movement of the underlying share price. And this means your losses can quickly mount up.

Yet this is also the reason why many people opt to trade CFDs, as small price movements can result in large profits.

CFDs versus shares difference #2: Cost

Trading CFDs is cheaper than investing in shares as you don’t have to pay many of the fees associated with buying and selling shares.

This is because when you trade CFDs, you don’t own the underlying shares.

CFDs versus shares difference #3: Holding period

You shouldn’t keep a CFD position open for the long-term.

Due to the funding charges you need to pay trading CFDs, it doesn’t make financial sense to keep a trade open for longer than a few months at the most. They’re short-term trading instruments.

On the other hand, investing in shares tends to be most beneficial if you hold onto your investment for a reasonable length of time, anything from a year upwards.

CFDs versus shares difference #4: You can short CFDs

When you invest in shares, you can only profit if the price rises. With CFDs, you can buy or sell.

By selling CFDs (shorting), you can profit if the price of the underlying share falls.

So there you have it. How trading CFDs differs from investing in shares.

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How trading CFDs differs from investing in shares
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