CFD vs. Real Asset Trading: Which is Better?

It is more convenient to trade with CFDs or to trade with real assets? Traders who have just started or are about to start, and therefore have yet to find their way and approach, are asking themselves this question. After all, the beginning is the time for choices, which can be decisive even in the long run. In this article, we try to unravel the question, to understand what is more convenient between CFD trading and "real" trading. We will compare the two activities, taking into account specific parameters. Before moving on to the analysis, a definition of CFD and a small clarification: although some elements are configured as objective, in the end the evaluation is subjective. That is, it can vary from trader to trader. There is nothing to be surprised about: if this were not the case, the two alternatives would not enjoy such a similar reputation (compared to the other).

What are CFDs

CFD stands for Contract For Difference. A CFD is a derivative product, i.e., an instrument that follows the price of an asset, which in jargon is called the underlying. It is enough to analyze the full name to understand the nature and purpose of this instrument. "Contract" indicates a particular dynamic, namely the agreement between the trader and the broker. When the trader purchases a CFD, they always and only do so from their broker, who in this case acts as a market maker. The trader, by entering into "a contract," speculates that the underlying asset will reach a given price at a given expiration. At that point, upon expiration, the trader makes profits/losses from the difference (hence the Difference in the name) between the real price or the established price. It goes without saying, but at this point you will have already guessed it, that trading with CFDs does not mean trading with assets, but rather exploiting their price fluctuations. Exchanging a CFD on the euro-dollar does not mean exchanging the euro-dollar pair. Similarly, exchanging CFDs on Bitcoin does not mean exchanging Bitcoin. A detail that is not insignificant, especially when it comes to cryptocurrencies.

CFDs vs. real assets: the offer

Below, we make a comparison between CFD trading and trading with real assets, taking into account some parameters. The first parameter is that of the offer, i.e., the number and variety of assets available to the trader. Well, making available the possibility to buy and sell more goods is a very complicated affair. From a technical and even regulatory point of view, it is more intuitive to arrange CFDs. Therefore, in general, the CFD offer is broader than the offer of real assets. It is not uncommon to find brokers offering hundreds and hundreds of assets to trade with. Well, they manage to do so precisely because they offer them in "CFD mode."

CFDs vs. real assets: the risks

The question here becomes complicated. From certain points of view, CFDs are riskier. From other points of view, they are less risky. CFDs are riskier because, in general, they are combined with a higher financial leverage. Financial leverage allows you to increase the effects of trades without increasing the investment. Of course, it is possible to earn more, but also to lose more. In short, it is the classic double-edged sword, which becomes incredibly sharp in the hands of beginners. All of this is exacerbated in the event that you operate from a non-European country. There, in fact, the ESMA rules do not apply, and it is possible to access leverage greater than 1:30, an additional temptation. However, CFDs are also less risky because they do not contemplate the real possession of the asset, with all that follows. For example, the possibility of a devaluation following a long deposit (CFDs never have very long expiries). Or, worse, the possibility of being defrauded, as often happens with cryptocurrencies. No one can steal your Bitcoins... If you don't have Bitcoins.

CFDs vs. real assets: operating methods

As far as operations are concerned, i.e., the dynamics underlying trading activity, there are not many differences. The only differentiating element is the relationship with downward trends. Since the CFD is "a speculation on the price," it also allows you to profit when the market is in a negative trend. This is a significant opportunity, although difficult to exploit.

CFDs vs. real assets: costs

As far as costs are concerned, the situation is less defined, and the context is more heterogeneous. In this case, it is not possible to provide objective data but only to detect a trend. Well, in general, CFDs allow you to reduce the expense for commissions. The reason, logically, is also quite simple: the exchange of real assets is more complex and involves more pervasive technical dynamics. Therefore, commissions are on average higher when trading with real assets. In fact, some brokers eliminate commissions and replace them with spreads. It is a possibility that is not at all precluded to them, since they are "market makers," and that indeed benefits both them and the trader.

CFDs vs. real assets: speed

As for speed, i.e., the execution time of orders, we can speak of objective elements. On average, but practically in almost all cases, CFD orders are much faster than orders involving real assets. It may seem like a minor detail, but it actually has a huge impact. It certainly affects scalpers, who play on the millisecond. It affects those who do automatic trading, which produces market entries conditioned by the price (and therefore this must always be updated). However, it also affects ordinary traders, as a slow transaction is more subject to micro-disconnections that would compromise the execution of the order itself. In short, CFDs are faster than real assets, which are their underlying, and this has a considerable impact.