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Experts generally agree that growing your wealth boils down to doing one or both things:
trading or investing. To an untrained eye, both concepts may seem the same — but the
differences are significant. Yes, they both involve buying and selling assets, but they rely on different strategies, risks, and time horizons. Investing, or the traditional form of investment, involves holding assets for extended periods, often with the goal of capital appreciation or earning passive income. However, trading is different — take CFD (Contract for Difference) trading, where you get to speculate on price movements without owning any underlying asset. But what are the pros and cons of making such trades?
Understanding CFD Trading
To start with, a Contract for Difference, or CFD for short, is a type of derivative financial
product that allows you to speculate on the price movement of an asset without actually
owning said asset. When trading a CFD, you do not buy the asset in question. Rather, you’re
entering a contract with a broker, agreeing to exchange the difference in price from the
trade’s opening to its closing.
First, you need to use reliable online trading platforms like MetaTrader 4 Singapore, where traders can connect with a broker that offers CFD products. Using an online trading platform like MT4 Singapore gives you many advantages, especially because it is widely used. It also offers advanced charting tools, automated trading features, and real-
time market data.
How Does CFD Trading Work?
As a CFD trader, you can either take long positions (buy) if you think a price will increase or
short positions (sell) if you expect a decline. This makes CFDs a flexible tool for capitalizing
on both rising and falling markets.
Also, when trading a CFD product, you often work with two things: margin and leverage.
These features allow traders to deposit only a fraction of the total trade value while gaining
full market exposure. Plus, leverage increases your potential for profits. However, it also
magnifies your potential for losses.
What Is Investing?
If you decide to invest in the traditional sense, you are buying financial assets like stocks,
ETFs, real estate, and bonds to accumulate wealth in the long term. As an investor, you
typically hold assets for extended periods, allowing you to benefit from capital appreciation,
dividend payments, or interest income.
The Goal of Investing
Ultimately, most people invest to build wealth. Depending on the type of investment, this can
happen in one of two ways:
● Capital appreciation: The increase in an asset’s value over time.
● Dividend or interest income: Regular payments received from stocks, bonds, or
real estate investments.
Key Factors for Comparison
Both options have distinct advantages and risks, which makes it really important for you to
align your choice with your financial goals, risk tolerance, and trading style.
1. Leverage
CFD Trading
Pros:
● Thanks to leverage (e.g., 10:1 or higher), you can control higher positions with a
smaller capital, potentially earning a higher return on your trades.
● CFDs allow you to profit from falling markets without needing to own the asset.
Cons:
● As you might have expected, there’s a catch to leverage. As leverages allow you to
amplify your gains, it also increases your potential losses, sometimes even more
than your initial capital.
● If the market moves against your position, you may be required to add more funds or
risk forced liquidation of your trade.
Investing
Pros:
● Since investments are fully owned, there’s no risk of margin calls or forced liquidation
due to leverage.
● Since investments are usually long-term, it is a more sustainable, steady approach
that reduces exposure to short-term market fluctuations.
Cons:
● In order for you to achieve a meaningful return on your investment, you often need
more upfront capital when compared to a leveraged CFD position.
2. Costs and Fees
CFD Trading
Pros:
● You don’t need to pay extra charges like stamp duty in countries like Singapore. This
lowers the barriers to entry significantly.
Cons:
● Other fees can quickly add up:
○ Spreads (difference between buy/sell price).
○ Overnight financing fees (for holding leveraged positions).
○ Commissions (depending on the broker and market).
Investing
Pros:
● As a long-term investor using buy-and-hold strategies, you benefit from minimal
trading fees.
● Apart from potential management fees, you do not bear any additional costs.
Cons:
1. However, commissions and fees can accumulate if you trade stocks frequently,
reducing returns.
3. Market Access and Flexibility
CFD Trading
Pros:
● CFDs provide access to different markets, such as stocks, forex, commodities, etc.,
most of which are outside the regular stock exchange hours.
● You can reduce your portfolio risks by using CFDs to hedge existing investments.
Investing
Pros:
● Depending on your type of investment, you can gain rights such as:
○ Dividends (profit-sharing from stocks).
○ Voting rights (influencing corporate decisions).
● You also have exclusive market access based on some investment opportunities,
such as IPOs (Initial Public Offerings) and dividend reinvestment programs (DRIPs)..
Cons:
● Traditional investing doesn’t offer easy short-selling or leveraged trading for quick
market moves.
4. Time Commitment and Effort
CFD Trading
Pros:
● Short-term CFD traders can capitalize on market volatility and profit within minutes or
hours.
Cons:
● Being a successful CFD trader means:
○ Constant market monitoring.
○ Technical and fundamental analysis skills.
○ Emotional discipline to handle rapid price movements.
Investing
Pros:
● If you decide to invest in ETFs, index funds, or dividend stocks, you aren’t required to
be actively managing the account. You deposit money into the account, select the
ETF or index fund you want to invest in, and leave it to grow.
Cons:
● Unlike CFDs, long-term investing requires patience since your gains can take years
or even decades to accumulate substantially.
5. Risk and Volatility
CFD Trading
Cons:
● High Volatility + Leverage = High Risk. Wild market swings can cause you to amass
a fortune or lose everything in the blink of an eye.
● Since CFDs don’t involve actual asset ownership, you’re fully relying on brokers for
trade execution and settlement, which carries inherent risks.
Investing
Pros:
● With a well-diversified investment portfolio (stocks, bonds, real estate) you can
withstand market downturns over a period of time.
Which Is Right for You?
There’s no single answer to which approach is best. You need to answer that question for
yourself, and the best way to do that is to assess your financial goals, risk tolerance, and
market knowledge before committing to a strategy. You might even combine both methods,
using CFD trading for short-term opportunities while maintaining a long-term investment
portfolio for stability. However, regardless of your choice, always remember that risk
management should be your priority.
