Why Trading Stock CFDs is Advantageous over Traditional Stocks

While it can be hard to fully quantify the full value of the global stock market, it is possible to appraise the value of firms on specific indexes. As of March 2021, for example, the total market value of the London Stock Exchange stood at approximately £3.81 trillion, with this number likely to fluctuate on a regular basis.

With this number in mind, it’s easy to understand why people would want to trade stocks, which traditionally represented ownership in successful and valuable companies that can deliver recurring dividends.

In the modern age, however, it’s possible to trade stocks as derivatives through contracts for difference (CFDs), allowing you to invest without assuming ownership of the underlying instrument. Here’s why you should consider this investment vehicle when entering the stock market.

1. Increased Leverage and Margin

This represents one of the core differences between CFDs over traditional stocks, as the former are traded using margin to create leverage within the marketplace.

When trading stocks through CFDs, you can actually open positions that are between five and 50-times larger than the value of your initial deposit, creating the potential for more significant gains (and losses if your trades turn against you).

The relationship between margin and leverage is simple; with the former acting as your deposit and the latter referring to the process of actually borrowing capital from a particular brokerage site.

Leverage is usually expressed as an easy-to-understand ratio, and there’s no doubt that this offers tremendous flexibility to traders who want to invest in particular stocks and marketplaces.

2. Gaining Access to Alternative Asset Classes

With traditional stock trading accounts, you can typically trade both corporeal equities and exchange traded funds (ETFs). However, other financial products are unavailable, making it hard to diversify your interests over time.

The same cannot be said for CFD trading platforms, however, which afford you access to multiple assets including forex, futures, commodities and even cryptocurrencies.

So, in addition to trading stocks through CFDs, you can access alternative asset classes across a broad range of markets, with popular examples including major currencies pairs like the EUR/USD and GBP/USD.

The true benefit of this can be experienced over time, as it enables you to gradually scale and diversify your portfolio in line with your experience and profitability (without having to change your underlying trading platform).

3. The Potential for Short Selling

Another compelling case for CFDs can be made in the form of short selling, with this far easier and more rewarding than attempting to do the same with a standard stock.

For example, whenever a short sale in a traditional equity is executed, the stock has to be effectively borrowed first prior to being sold. This can also be prohibitively expensive for retail traders, although it does offer the potential for sizable returns in some instances.

This process is considerably easier and more straightforward with CFDs, which make it relatively simple to go either short or long on a particular stock depending on your wider investment outlook.

Sure, there are a handful of stocks that cannot be short-sold, but these represent a vanishingly small number and nowhere enough to deter individuals from profiting through CFDs.