Stock Trading or CFD Trading – How Much Capital Do You Need To Trade?
Traditional stock trading allows the trader to buy or sell an asset, whilst gaining full ownership of the underlying asset and you can sell it to another trader at your will. But the instances are different if you are trading CFDs. You don’t get to own the underlying asset but you can speculate on its price movement and you can also buy or sell the contract. Talking about the contract, this is an agreement between both the CFD provider and the trader. Although traditional trading and CFD trading are quite similar in most cases, there are some differences that must be noted.
In CFD trading, the trader secures an agreement with the broker to trade the underlying asset without owning it. The difference between the opening and closing price will also be paid at the end of every trading day.
In CFD trading, the margin is being used. This margin is like the money you borrow from your broker. Margin is used to leverage your trading funds and therefore, you can open a larger trading position with the minimum capital that you have.
In CFD trading, you are relieved from paying UK stamp duty which is 0.5% of your earnings.
As for traditional stock trading, you can buy or sell stocks after paying their full amount. You are also set to deliver the underlying asset.
How Much Money Do You Need To Trade?
Brokers are following different rules that vary from one platform to another. But generally speaking, we can say that one contract for difference is equal to one share if you are doing share trading. But in CFD, you will not be required to have huge funds to open a trading position. Most of the time, you will only be required to pay 5% to 20% of the full value of the underlying asset.
That being said, that 5% margin equals more chances to open other positions. You can get as much as 20x higher exposure compared to traditional shares trading. For instance, you buy 5 shares worth $200. In traditional trading, you will be asked to pay $1000 to start trading. However, if you buy shares on CFD with the same amount and the margin is 10%, you will only be required to pay $100 to open a trade. The rest of your money, you can use to open more positions. This means that you have 10x higher chances of profit.
The disadvantage of CFD Trading
You may already have the urge to start trading CFDs now that you’ve known how powerful leverage is. But don’t get too excited. Leverage also has its own set of advantages that must not be taken lightly. Leverage is a double-edged sword. Your gains are mirrored and your losses as well. When you use leverage, even the smallest price movement can affect the trader’s capital.
Aside from leverage, you also get subjected to counterparty risks in CFD trading. This is because you do not own the underlying asset but only the contract. It is therefore very important to pick a reliable CFD broker that is licensed and regulated.