Equity/shares vs. CFD/forex trading
When first venturing into the world of online trading and investments, it is useful to establish your investment profile from the outset.
In doing this, you will better be able to establish a portfolio that suits your trading strategy and your investment goals.
Equity or shares trading is a very popular asset category amongst traders and investors, while trading Forex using CFDs is one of the more useful approaches amongst Forex traders.
In this article, we unpack the essential differences between equity or shares and CFD trading, allowing you to make the best decision for your trading career going forward.
For traders throughout the world, trading stocks and shares has long been one of the most enticing investing options since it offers a diverse selection of sectors, industries and countries to select from.
It’s common for companies to issue shares in order to raise funds at the beginning of their operations, or to prepare for future expansion.
By purchasing shares of a company, an investor acquires a stake in that business, giving them voting rights and the right to a share of the company’s income, which is known as a dividend.
Because the owner of shares has a stake in the company in which they invest, stock trading is also known as equity trading. The stock market offers a wide range of trading options in a wide range of industries.
Long-term success in trading shares requires a thorough understanding of the elements that influence price movements, as well as a wide understanding of the broader market’s performance.
You should conduct a lot of research about the company you’re contemplating if you’re just starting out.
In-depth information on many companies can be found on their websites, such as financial performance statements and investment plans. There is also information about dividend payments and mergers.
Once you have selected the best shares for your portfolio, there are a number of important tactics that can be employed on order to trade shares successfully.
1. Treat market research as an ongoing factor
Online stock trading can be done with a short-term focus or a long-term approach. It doesn’t matter how long you plan to stay in the market; you should always be keeping an eye out for new events and data releases that could affect your current position.
Advanced indicators and drawing tools can assist you pick the best time to exit the market by defining resistance and support levels.
2. Employ an effective risk management approach
Any effective trading technique, including stock trading, relies on prudent risk management. It’s possible to select a level of risk that you’re comfortable with using stop losses and limit orders. There must always be enough room to meet the cost of the position, so be sure to pick a size that corresponds to your budget.
3. Enter the market at the right time
Before you establish a position, you’ll have done a lot of research and analysis, which will give you crucial information about the best time to begin trading.
In addition to knowing the share’s long-term price direction and an indication of potential future price changes, you’ll gain a thorough understanding of current market patterns and emotion, which help you to best decide when to buy and when to sell.
4. Make sure you’ve chosen the right shares
When you first start trading stocks, you’ll have a vast variety of options to pick from. There are a wide range of markets to choose from, including those in the United Kingdom, the United States, Europe, and Asia.
It’s important to choose a Share that is one that has been studied extensively, or a company that you follow and are familiar with.
What is CFD Forex trading?
In order to get a better understanding of CFD Forex trading, it is important to understand how these two investment approaches work, and how they can be used in tandem.
Understanding Forex trading
Foreign exchange, sometimes known as forex, can be described as a network of buyers and sellers who exchange currencies at a predetermined rate. To put it another way, if you’ve ever been outside of your own country, chances are you’ve engaged in a forex transaction.
Despite the fact that many currency exchanges are carried out for purely practical reasons, the great majority of them are carried out with the express objective of making money for the trader.
Price fluctuations in some currencies can become exceedingly volatile due to the large volume of currency exchanged each day.
Forex trading does not take place on an exchange, but rather between two parties in an over-the-counter (OTC) market, unlike the trade of stocks or commodities.
There are four major currency trading centers: London, New York, Sydney, and Tokyo, each located in a separate time zone. Due to the lack of a central exchange, you can trade FX around the clock.
Because of the wide variety of currencies traded on the forex market, it can be difficult make accurate predictions about the direction of exchange rates. Therefore it is crucial to get a grasp of the elements that cause price movements.
Understanding Contracts for Difference (CFDs)
When trading with CFDs, an investor and a CFD broker agree to exchange the difference in the value of a financial instrument (securities or derivatives) between the opening and closing dates of the contract.
CFDs do not involve the transfer of tangible assets or securities. A CFD investor does not actually own the underlying asset, but rather receives a profit based on the asset’s price movement.
Using this method, it’s possible for a trader to speculate on whether gold’s price will go up or down instead of actually buying or selling any gold, for example.
This means that CFDs are used for making wagers on whether or not prices for underlying assets or securities will go up or down. Traders can place their bets on a price movement going either up or down.
After purchasing a CFD, the trader will want to sell their investment if they see an increase in the asset’s value.
How to trade Forex using CFDs
Forex trading is based on the exchange of one currency for another currency. For example, if you were to buy GBP/USD, you would profit if the pound rose versus the US dollar or lose money if the exchange rate fell.
CFD trading allows you to speculate on the movement of the underlying instrument by placing leveraged transactions on currency pairings. Cash-settled CFDs are based on the difference in opening and closing currency prices, rather than a fixed amount of base currency.
You may increase your transaction size while investing only a modest amount of capital while trading CFDs, which is a significant component of the strategy.
However, it’s important to remember that maintaining a high level of exposure can lead to more earnings, but can lead to greater losses as well.
When starting out with trading Forex as CFDs, there are a few useful steps which you should take in order to set up a sound investment approach.
1. Select the currency pairs you would like to trade
This is an important first step, and traders can select from major, minor or exotic currency pair options. Whichever you choose will depend on the level of risk you are willing to undertake and the prevailing market conditions.
It is also useful to visit a broker’s contract specifications page to see the currency pairs on offer, as well as the available leverage and the contract costs.
2. Decide on your position
If you believe the price of your selected currency pairs will go up, you can open a long position (buy) or a short one (sell).
You can use a wide variety of indicators, charts, and signals to determine what kind of trade to open. The next step is to decide how big of a position you’d like to create.
Because the value of a CFD unit fluctuates based on the underlying value, you should figure out how many CFD units you need to execute your trading strategy effectively.
3. Ensure you’ve selected an effective trading platform
There is a broad selection of trading platforms available on the Forex market today, but whichever one you choose should be determined by your experience level, your trading strategy and your desired goals.
To this end, trading Forex CFDs has become very popular on the MT4 and MT5 platforms from MetaQuotes, which are some of the most popular software options in the industry.
Over 50 technical indicators and charting tools are available on these platforms, making it easy to trade CFDs. It is possible to trade while on the go using mobile apps that allow you to see your earnings and losses as they happen right away.
Final Thoughts
Both shares trading and Forex CFD trading present numerous advantages to traders and investors. However, whichever approach you choose will depend on you unique trading style and portfolio goals.
That is why it is crucial to conduct thorough market research before investing in either asset class to ensure you sufficient knowledge to manage your portfolio and risk effectively.
Other useful resources:
FSCA Regulated Forex Brokers in South Africa
