Physical shares, options, CFD shares and the difference between them

Stock trading is probably best understood theoretically for the general public. Buy cheap and sell high, almost everyone understands that. After that, considerably fewer people know that other instruments can be traded, such as commodities and forex currency pairs, or in more interesting ways such as CFDs, options and others.

In this article, we will explain the differences between them and describe them in more detail.

A contract for difference (CFD) is a contract between two parties, a “buyer” and a “seller”, which orders the seller to pay the buyer the difference between the current value of the asset and its value at the time the contract was concluded. If this difference is negative, the buyer pays the seller instead. CFDs are financial derivatives that allow investors to benefit from an increase (long position) or decrease (short position) in the prices of underlying financial instruments and are often used to speculate on those prices.
This is a so-called derivative, which means that the price of the CFD is derived from a certain underlying asset. Derivatives are highly speculative instruments that allow for large profits with small capital investment, but they are also associated with a high level of risk and can lead to high losses. Therefore, only experienced traders should trade with them.
However, CFD trading also involves huge risks for investors, as leverage works both ways. Even a small change in the price of the underlying asset can thus lead to huge losses, to which investors should adjust the size of the position. The market price of CFDs may differ from the actual prices on the exchange.

Difference between CFD shares and physical shares
The biggest difference is the fact that, unlike physical shares, you do not become their owner when trading CFD shares.
Now let’s look at another of the differences between CFDs and physical shares.
Although you are the owner of a physical share, you do not have financial leverage, the opposite is the case with a CFD share.
A physical stock can be a long-term investment, a stock CFD is not.
Furthermore, with CFD shares, you can earn from the drop in price, but not with physical shares, and you don’t have swap fees for physical shares, but with CFD shares, you do.
Each type of stock has its advantages, it is up to you what strategy or preference you have.

What are Options
An option is a contract between the seller and the buyer, which gives the buyer the right (but does not oblige him) to sell or buy from the seller a specific asset (the so-called underlying asset) at a specific price either at a certain time (European option) or at any time until the expiration date of the contract ( American option).
An option can be either a call or a put, which means either the right to buy or sell.
Similar to CFDs, Options are another financial instrument from the group of derivatives, but they work on a diametrically different principle. It is a contract between a seller and a buyer that allows the buyer to buy or sell a certain asset at a pre-agreed price during a pre-agreed period. In a way, Options are very similar to futures contracts with one significant difference – the owner of the option is not obliged to buy/sell the option and can withdraw from it if it is not beneficial for him.
An important factor here is the difference between loss and profit. As a demander, you can lose at most the option premium paid at the beginning, but your profit can grow theoretically indefinitely. Whereas the seller has it exactly the opposite. His maximum amount of profit is the option premium, while the loss can grow and grow.

 

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