Stocks rock, but CFDs are on the rise
At the end of 2018, the total market capitalisation of all stocks worldwide was just short of USD 70 trillion*. That’s quite the tidy sum. But it’s not hard to see the appeal of stocks for investors. For starters, they:
- Are easy to buy, sell and understand
- Offer a good way to stay ahead of inflation
- Enable you to take advantage of a growing economy
- Provide a sense of security, as you own a portion of a tangible company
Sure, stocks have a lot going for them and might be just the right investment for you. But CFDs have a few key advantages over stocks – helping them soar in popularity over the past decade – which means they could make a useful addition to your portfolio.
Source: *Market capitalization of listed domestic companies (current US$),The World Bank.
What is a CFD?
CFD is short for ‘contract for difference’. A CFD is a derivative product that enables you to trade financial markets, including stocks, forex, indices and commodities, without having to own the underlying assets.
When you trade a CFD, you enter into a financial contract with a broker to exchange the difference in price of an underlying security (such as a stock) from the moment you enter the trade to the moment you exit it.
For example, if you think Apple’s share price will go up in value, you can buy a stock CFD at the current market price. If Apple’s share price then rises and you sell your CFD at the higher price, your broker will deposit the difference into your account.
While that might sound like standard stock trade, trading a CFD offers some unique advantages, which we’ll explore in more detail below.
Key advantages of CFDs vs share dealing
There are two major advantages CFDs offer over traditional plain vanilla stocks: leverage and shorting.
CFDs enable you to increase your purchasing power as you can trade them on leverage. This means you only need to put up a fraction of the full value of your trade – the ‘margin’ – to gain full exposure.
On most stocks, Saxo offers leverage up to 10x (and up to 40x on stock indices). This means that with only GBP 1,000 in capital, you could gain exposure to GBP 10,000 worth of shares. That’s obviously 10 times what would be possible through conventional share dealing.