Should I trade CFDs or better stocks?

When designing individual capital investment strategies, the question arises again and again whether, when building up assets, one should speculate either on the asset class of shares or rather with CFDs? Basically, these are two completely different things. One is speculating, the other rather investing.

But first: What is a CFD and how does CFD trading work? A CFD is a contract for difference, in which the potential investor speculates on the price trend of the underlying asset itself. The holding period for a CFD is often only a few minutes, hours to days. CFDs can be traded either "long" (on rising prices) or "short" (on falling prices). CFD trading can also be leveraged. In the EU, leverage of up to 1:30 is allowed for forex trading.

In contrast, stock trading describes a form of investing in which the potential investor invests in certain company shares over the long term. These can also be traded in the meantime, of course, or they can also be traded "long" or "short" with the help of certificates and warrants.

Which asset class is more suitable for private investors? In the following sections, we will take a closer look at this topic.

The most important features and opportunities of shares at a glance:

Shares in themselves are more suitable for a long-term investment horizon. Statistically, the longer an investor holds a stock, the greater the probability of a positive return. A positive return can generally be expected from a holding period of 10 years or more, provided the company is solid and has a good business strategy.

Of course, shares can also be sold or newly bought at any time. In addition to CFD trading, stock trading can also be carried out in this way.

Since shares tend to be long-term investment objects, they are often used for long-term asset accumulation. A distinction must be made between dividend shares and growth shares. While dividend shares offer investors distributions in the form of dividends at regular intervals, growth shares reinvest company profits directly back into the company.

Even with shares, a potential total loss is of course possible at any time. After all, there is only one company behind a share, which means that the individual share investment can harbor a cluster risk. However, the risk can be significantly minimized by investing in a basket of shares that is as diversified as possible.

The main features and opportunities of CFDs at a glance:

In contrast, a CFD is more suitable for short-term speculation. Here, the potential investor does not acquire a proportionate ownership in a company, but merely buys into the price trend. CFD trading can therefore be understood as speculation.

With various leverage options, the trader can increase his return on equity in CFD trading, but this is also associated with a significantly greater risk than if, for example, only with equity is invested in shares. The risk of larger losses up to the total loss is also here in the room!

Since CFD trading is short-term oriented, it is under no circumstances suitable for long-term passive wealth accumulation. CFD trading is rather to be understood as an active activity and involves a significantly higher risk than pure stock trading. Some traders pursue CFD trading as a full-time profession and earn their living with it.

The difference between trading and investing:

Whether you choose short-term speculation (CFD trading) or long-term investing makes a huge difference! CFD trading, for example, is about realizing short-term gains through active trading. Investing in stocks is more about building long-term wealth or passive returns through a passive approach.

A speculator or trader therefore hopes for short-term profits from his trades, with which he earns his living, for example. An investor, on the other hand, invests his money over a long time horizon and participates in various companies with the expectation of experiencing long-term price gains and increasing dividends. In retirement, for example, the dividends can be used as alternative pension payments.

Finally, as a potential investor or trader, you should first be clear about whether you actually want to trade or rather invest? Both variants offer advantages, but also disadvantages. CFD trading in particular is described as risky and highly speculative and is not suitable for long-term asset accumulation.

The implementation of trading also differs significantly from the investment approach: the trader uses his capital to enter into short-term trades and quickly liquidate them again. The investor rather puts money "aside" to invest it in various investment objects (e.g. shares). He can either invest all at once or continuously in the form of savings plans (monthly, quarterly or annually as well as in individual time intervals).

Why investments in shares are particularly sustainable:

Over the past 125 years, investors have been able to realize an average return of around 9.00 percent per year on the stock market (no guarantee!). When compiling your individual stock portfolio, it is best to diversify as widely as possible in order to reduce your individual risk. It is therefore best to invest in shares from different sectors, countries and company sizes. In this way, you can ensure that you are as close as possible to the average market return over the long term.

In the long term, good shares therefore rise by around 9.00 percent per year. The returns generated by the shares also grow at the same time. An investment of 10,000 euros on the 18th birthday can quickly grow to around 575,000 euros by the time you retire at the age of 65, assuming average market returns.

In the long term, you are therefore on the much safer and, above all, more sustainable side with good shares. On the one hand, they can help you build up assets over the long term, and on the other hand, they can help you create passive income for your old age.

Why CFDs are not suitable as an investment:

In any case, a CFD is not suitable as an investment. Since CFD trading is rather short-term in nature, you should not consider it in your long-term investment strategy. CFD trading in itself carries a significantly higher risk than, for example, stock investments.

The risk of a total loss in CFD trading is also significantly increased by the fact that you can trade with leverage. Leverage is a short-term borrowing that you take out for trading with the broker in the form of a Lombard loan. This not only incurs high fees, but also significantly increases your risk of a total loss!

Other reasons that speak against CFDs as an investment are the sometimes high fees that they cause. On the one hand, you pay your broker so-called spreads to be able to take a trade at all. These are price reductions that the broker retains as a fee. Furthermore, there are expensive fees for a potential overnight financing. The costs for an overnight financing arise because the broker has to provide the outside capital used behind the CFD. Of course, you have to pay your broker dearly for this loss of liquidity.

Conclusion on the subject of investing in shares or trading CFDs

In the short term, large profits can be made with CFDs (even with a small capital investment), but the risk here (compared to long-term equity investments) is significantly increased. Around 70-90 percent of all investors lose money in CFD trading. With long-term stock investments, on the other hand, the probability of experiencing losses decreases significantly from a holding period of 10 years.

By deciding against short-term CFD trading and buying shares only with equity, or leaving them in the portfolio for the long term, you will almost certainly be able to experience high profits. By the way, long-term stock investments often have the advantage that they offer you nice profit distributions in the form of dividends!

However, if you have experience in trading, you can also make good profits in CFD trading. With a good strategy and a solid risk management, you can significantly reduce the risk in CFD trading and trading with leverage.

If you are interested in CFD trading, we recommend you to use our CFD broker comparison to find the best CFD broker for you right CFD broker to find.