The Internet provides a range of earning instruments that were inconceivable decades ago. Earning is not limited to full-time employment, and global financial markets are accessed at the click of a mouse. In line with technological evolution, stock trading has also been transfigured. While old-school corporate stocks still exist, the best Forex trading platform offers novel ways to profit from exchange dynamics.
If you still think that only shareholders can profit from changes in prices of shares, you are not yet familiar with CFDs (Contracts for Difference). This scheme is provided by Forex trading brokers, such as ForexTime, and it is gaining traction in South Africa. Now, the world of global finance is more accessible than ever.
Old-school Stock Trading
Stocks issued during IPO are a way for companies to attract investor capital. Those who purchase shares become shareholders, i.e., they now own a percentage of the corporation (even if it is merely a faction). In this scheme, stocks function as physical assets.
These allow their holders to receive regular dividends based on the firm’s performance. Hence, traditional stocks are often perceived as a long-term investment. It is something that could be left to your children and grandchildren as an inheritance. However, there are different positions in use.
Traders, going long or short, rely on the same logic as the one on currency exchange. If you expect the price of your asset to nosedive, you are likely to sell it now, thereby going “short”. Later, you could buy more of the stocks back for less.
On the other hand, a player expecting the instrument to gain value will do the opposite – delay selling. A long position enables the patient ones to wait for the most favorable trading conditions.
The Principles of CFD Share Trading
CFDs are widely spread in different realms of the digital economy. There are CFDs on currencies, commodities, and even market indices. In any situation, the scheme will be based on a contract between the seller and the buyer of a certain CFD. The subject of this agreement is the movement of the corresponding price.
A buyer does not own the asset and does not become a shareholder. Without actual ownership, speculators have more freedom and flexibility. Rises and falls on the market make it possible to cash in financial foresight.
Key Distinctions Between the Instruments
Here are the most salient differences that highlight the benefits of CFDs. Here is what makes them preferable for traders in Nigeria and elsewhere.
1. Absence of Physical Assets
Physical share trading takes place on a physical exchange. Today, when we are used to getting services and goods through the Internet, finance flows are no exception. To benefit from stock value fluctuations, one does not have to own a stake in the chosen corporation.
Price dynamics form the basis of online speculation and all operations are conducted remotely via digital tools. In this respect, CFDs on shares function similarly to CFDs on currencies that do not involve real cash.
2. Convenient Trading Time
Physical shares may only be traded when the corresponding exchange is open. Purely digital CFDs, on the other hand, can be bought and sold 24 hours a day 5 days a week.
3. More Flexibility
Conventional shares are usually purchased with long-term investment goals in mind. CFDs allow a range of schemes. These include intra-day, daily, and medium-term periods. You may choose your own strategy based on market analysis and personal preferences.
4. Trading Volumes
Lot sizes are determined by you only. Thanks to the option of leverage, you gain access to larger volumes than you could afford with the deposited sum. Ratios differ from broker to broker. For instance, leverage of 1:100 means trading of $10,000 will only require a deposit of $100 (referred to as initial margin).
5. No Shorting Restrictions
Short positions are associated with limitations in certain markets. For instance, you may not be able to go short unless you borrow the asset traded. CFDs, on the other hand, entail no such restrictions. This may be done at any time with no borrowing costs imposed. As traders do not own physical assets, there is more flexibility.