Differences Between Contract for Difference (CFD) Trading and Securities Trading
Contract for Difference (CFD) Trading |
Securities Trading |
|
Tradable Range |
Wide range of assets including stocks, indices, et |
Limited to trading stocks |
Ownership |
No |
Yes |
Leverage |
Available |
Not available |
Trading Hours |
24/7 |
Limited to exchange trading hours |
Cost Structure |
Only need to pay spreads and possible overnight interest |
Need to pay trading commissions, transaction taxes, stamp duties, etc. |
Dividends and Voting Rights |
No shareholder rights |
Entitled to company dividends and voting rights |
Short Selling |
Can be achieved through betting on both rising and falling prices |
Requires borrowing stocks for short selling |
Case Study of CFD and Stock Trading:
Allen, an avid investor in financial markets, decided to explore both Contract for Difference (CFD) trading and stock trading to invest in Apple Inc. He chose a regulated online trading platform and embarked on his trading journey.
Market Analysis:
Allen first examined the stock market of Apple Inc. and noticed that the current buying price was 306.89 and the selling price was 306.98. After analyzing the company's fundamentals, technical aspects, and market trends, he believed that Apple Inc. stock had the potential to rise.
Account Opening and Deposit:
For CFD Trading: Allen completed the account opening process on the selected trading platform and deposited the initial funds as required. Since CFD trading allows the use of leverage, Allen chose a leverage ratio of 10:1, which meant he only needed to pay one-tenth of the stock value as margin to trade.
For Stock Trading: Allen first selected a reputable securities firm and completed the account opening process on its official website. He provided necessary information such as identification and contact details as required by the securities firm and successfully deposited 6139.6 yuan into the trading account.
Placing Orders to Purchase:
For CFD Trading: At three o'clock in the morning, Allen decided to buy Apple Inc. stock CFDs. He entered the purchase quantity and price, and chose to buy 20 shares of Apple Inc. stock CFDs at the selling price of 306.98. Since he used a leverage ratio of 10:1, he actually paid a margin of 613.96 (306.98 * 20 * 1/5).
For Stock Trading: At three o'clock in the morning, Allen opened the securities firm's trading software but found that the stock market was not yet open for trading. The next day, when the stock market opened, Allen immediately entered the stock code and purchase quantity, and chose to buy at the current market price. He also noted that stock trading incurs trading commissions, which he factored into his cost considerations.
Executing Trades and Monitoring Positions:
After successful execution of trades, Allen closely monitored the price movements of Apple Inc. stock. He utilized the rea-time market data and charting tools provided by the trading platform to stay updated with market dynamics and adjust his trading strategy accordingly.
Closing Positions:
For CFD Trading: After holding the positions for a period, Allen observed that the price of Apple Inc. stock had risen to 327.11. He deemed this an appropriate selling opportunity and chose to close his positions, i.e., selling the Apple Inc. stock CFDs at the price of 327.11.
For Stock Trading: There is no concept of closing positions; selling stocks is usually referred to as "selling" or "disposing" rather than closing positions.
Calculate Profits
Contract for Difference (CFD) |
Stock Trading |
|
Buy Price |
$306.89 |
$306.89 |
Deal Price |
$306.98 |
$306.98 |
Quantity |
20 shares |
20 shares |
Sell Price |
$327.11 |
$327.11 |
Initial Investment |
$613.96 (Margin 10:1) |
$6139.6 |
Profit per Share |
$20.13 |
$20.13 |
Total Profit |
$402.6 (Profit per Share $20.13 * 20 shares = $402.6) |
$402.6 |
When engaging in contract for difference (CFD) trading, Allen utilized leverage, allowing him to invest only a portion of the initial value as margin, totaling $613.96. On the other hand, in stock trading, he was required to invest the entire asset value, amounting to $6139.6. Despite both yielding a total profit of $402.6, the difference lies in the cost structure between CFD trading and stock trading. While CFD trading involves paying only spreads and overnight interest, stock trading requires fees such as commissions and stamp duty. Thus, Allen's profits from investing in CFDs and stocks differ. However, it's worth noting that while leverage amplifies profits, it may also increase the risk of losses.
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