The advantages of CFDs vs Stocks

Thought Starters 5 minutes to read

Saxo Group

Summary:  Are you putting too much stock in stocks? Take a minute to discover the unique benefits of expanding your portfolio into contracts for difference (CFDs).


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 buying stocks

There are two major advantages CFDs offer over traditional plain vanilla stocks: leverage and shorting.

1. Leverage

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 SGD 1,000 in capital, you could gain exposure to SGD 10,000 worth of stocks. That’s 10 times what would be possible with a conventional stock trade.

Be aware that while this additional exposure amplifies your potential profits, your potential loss is also amplified to the same extent.

2. The ability to go long and short
When you buy stocks, you can only make a profit when markets are rising. And markets almost never go up in a straight line. When you trade a CFD, however, you can speculate on price movements in either direction. This is known as going ‘long’ (if you back prices to rise) or ‘short’ (if you back markets to fall). 

So, if you think the share price of BP is going to fall, you could short it by ‘selling’ a stock CFD. You can do this because CFDs are derivatives, and you don’t need to actually own any BP shares to sell CFDs based on its stock.

If you’ve sold a BP CFD, and the company’s shares fall in price, you can profit by buying the CFD back at a lower level and pocketing the difference between your entry and exit prices.

The chart below illustrates the difference between a long and a short position and how it’s possible to profit from both rising and falling markets.
To explore the above advantages, you can trade CFDs risk-free in our demo.

Aside from those two major advantages, CFDs have a range of unique characteristics. 

  • Access to a wide range of markets
    If you want to speculate on the financial markets, you don’t need to limit yourself to exchange traded products such as stocks and ETFs. Generally, you can trade CFDs on a much wider range of assets. At Saxo, for example, we offer CFDs on stocks, stock indices, forex, commodities, options and bonds. 
  • Around-the-clock trading
    When you deal shares, you are constrained by the opening hours of the corresponding stock exchange. That leaves you exposed to the risk of overnight price moves due to unexpected market events. You can trade CFDs whenever the underlying markets are open – stock CFDs for instance are available for trading when the associated stock market is open. However, CFDs on stock indices such as the UK 100, US 30 or Hong Kong 50, trade round the clock in tandem with the underlying futures contracts – so you can hedge or trade unexpected market events as they happen.
  • Immediate cash settlement
    Unlike stocks, CFDs don’t have a settlement period. That means your profit or loss is calculated as soon as you close your position. This makes it much easier to enter and exit trades and allocate your resources quickly to your next position. With stock positions, on the other hand, it can take up to two days for your trade to settle and for you to gain access to your capital.

Switching between stocks and CFDs is easy

If you generally invest in stocks but would like to give CFDs a go, you can switch between the two products quickly and easily with Saxo. If you have a stock open in our trade ticket, you can switch straight to a CFD trade simply by clicking the CFD icon in the top-right corner. With just one click of a button, you’ll be able to add leverage and shorting to your toolbox, and take advantage of all the other benefits CFDs offer.

So, whether you’d like to continue trading stocks or put the benefits of CFDs into action, we have a diverse offering that can cater to your needs. Why not give us a try or put our products and platform to the test with a free, 20-day demo trial?

The No. 1 choice for stock and CFD trading** 

We’ve won multiple awards from the likes of Finance Magnates and ADVFN for our products and platforms. But the real reason stock and CFD traders choose us is that we’ve built a well-rounded offering that provides maximum trading flexibility. We can offer you:

  • Ultra-competitive prices on stocks and CFDs
  • Access to a wide range of stocks from core and emerging markets
  • CFDs on stocks, indices, forex, commodities, options and bonds
  • Award-winning trading platforms, tailored to your experience level
  • Powerful trading tools and natively designed apps
  • 24-hour service in your local language

Source: **Best CFD retail broker, 2018, Finance Magnates.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.