CFD trading and share trading in Singapore are two types of trading that often get confused and mixed up. They both look like they require buying stocks and then selling them back with a better price tag attached to them, which is what people think CFD stands for Contract For Differences.
However, CFD has more than just simple stock-buying and selling; therefore, this article will explore the differences between the two types of financial instruments.
The main differences between share trading and CFD
The main difference between share trading and CFD lies in how their value changes. At the same time, you hold onto your investment or contract – share prices go up when the market goes up while CFDs values change along with its underlying index according to demand.
CFD trading vs share trading in Singapore often get mixed up due to their resemblance in buying and selling stock – but when learning how both work, knowing the difference between CFDs and shares is essential when using either one or both these financial instruments.
What is share trading?
Share trading is when the investor buys a real-world stake in a company. In Singapore, most of these stocks are traded at the SGX – the stock exchange within our country’s borders. When investors buy into a certain amount of shares from a particular company, they own an actual percentage of its assets.
If the company does well, it will see an increase in share prices which directly correlates to profits for existing shareholders. The price you purchased your stock is represented by its “Close Price”, which means how much each share costs at closing time (4:30 pm).
Share trading also involves shorting stocks. Shorting stocks allow investors to profit off falling prices, not just rising ones. It is done by the investor borrowing a certain amount of stocks from his broker, selling them at their current price. They were then repurchasing it when its value had dropped to repay the loan with the stock he borrowed earlier – essentially making a profit off its drop in price.
Share trading is also known as share investment, equity investment, or direct investment.
What is CFD Trading?
CFD trading involves paying a premium for a contract with a broker, which entitles you to trade on its underlying index against another counterparty (most commonly your broker). CFDs are not real financial instruments themselves, and they are derivatives representing underlying indexes like FTSE100.
The primary difference between using CFDs and investing in FTSE100 is that your profits are not tied to the success of the original company. Instead, it will be determined by the change in the index value. Using CFDs, you can make money whether markets go up or down (by opening short positions). It makes them unique as they allow investors to trade indices without buying actual shares within it.
CFDs also have an expiry date after which the contract expires and becomes worthless if you haven’t sold it yet (this is similar to options, where they too expire). The difference between a share and CFD lies here: when buying stocks, you own a percentage of the company’s assets which will rise according to how well its business does.
If you bought £100 worth of Tesco stocks and their value went up to £120, you would make a 20% profit (assuming you sold it at the closing price). If, however, you decided to go for CFDs against FTSE100 and the index fell from 7200 to 7000 within that same amount of time, your contract will still expire without any value.
Though trading both shares and CFD simultaneously can prove highly beneficial, traders should understand the benefits associated with each type of trade before making an investment decision. If you are ready to explore lucrative opportunities in financial markets, be sure to use a reputable online broker like Saxo Bank; read more here and start your investment journey now.