Trading Stocks vs Trading CFDs: The Real Deal

Equities, i.e. stocks, are the go-to investment option for the majority of traders. In fact, financial portfolios (baskets of investments) typically include things like ETFs (Exchange Traded Funds), mutual funds, individual stocks, commodities, Forex, CFDs, and other derivative trading instruments. In a conventional sense, most investors prefer to have physical stock holdings in leading companies like Google, Facebook, Bank of America, Wells Fargo & Company, Boeing, Deutsche Bank, Caterpillar, Nike, Walmart etc.

As these companies grow their operations, the value of their stocks tends to increase over time. Effective portfolio management requires the careful allocation of assets to maximize returns on investment (ROI). Naturally, there is inherent risk in stocks, much like there is in Forex, indices, and commodities. The best approach to adopt with stocks and portfolio management is one which diversifies risk across multiple sectors.

What Are the Benefits of Stock Holdings?

  • Stocks give you physical ownership in a company.
  • As the stock appreciates in value, so too does your net worth and your interest in the company.
  • Certain stocks pay dividends when they perform well, and stockholders can benefit from these dividend payments.
  • Stocks are long-term investments that can pave the way for a secure retirement.

Like any investment, an element of risk is involved. Clients cannot expect every stock to appreciate indefinitely. There will be periods where the company undergoes restructuring, diversification, asset reallocation, divestiture, or price corrections. Sometimes, public companies merge with others, get bought out, or close up shop. Traders and investors should stay abreast of the latest developments with the company, and the market, to forecast price movements of stocks. The major exchanges where traders can participate in stock markets include the Dow Jones Industrial Average, the NASDAQ Composite Index, the S&P 500, the CAC 40, the DAX 30, the Nikkei 225, the JSE, the FTSE 100, and the FTSE 250. These are known as the bourses where stocks are traded.

Various platforms like eToro, provide clients with opportunities to invest in the stock market, with scores of share dealing opportunities. Stock market trading on companies like Coca-Cola, IBM, FedEx, Walmart, Deutsche Bank, Anglo American, Chevron and other traded stocks are a wonderful way to immerse oneself in the financial markets. Typically, old-school investment paradigms required clients to go through a broker who managed of their funds on their behalf. Today, there are trading platforms that allow clients to take an active hand in their own portfolio management.

What Are the Benefits of CFD Trading?

CFDs are derivatives trading instruments. They are typically used as a hedge against stock market investments. This means that if you are holding stocks of a company as an asset, you can hedge against the downturn in those assets by purchasing CFDs. Derivatives trading instruments do not require the owner of the stocks to actually buy the stocks – you are merely purchasing a contract that mirrors the price performance of the underlying asset. So, if Google is expected to depreciate with a CFD from $1,100 per share to $1,000 per share, you could purchase a CFD on GOOG with a put option for a future date of delivery. Your actual stock may depreciate, but you would benefit from having the CFD which would appreciate. CFDs have several benefits including the following

  • A hedge against downturns in the stock market
  • Tax benefits – losses can be written off against profits
  • Leverage can work in your favour, provided you call it correctly
  • No need to buy actual stocks – you are simply speculating on price movements

Overall, it is advisable that traders and investors utilize a mix of CFDs and actual stock investments to build their financial portfolio. The latest brokerage to offer a combination of real stock investments and CFDs is eToro, a global leader in online trading.

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