This is a sponsored article. The thoughts and ideas in this article are brought to you buy IG.
In the world of trading, a CFD or contract for difference is an agreement that’s made between a trader and broker. The trader will buy a contract from the broker, where they predict whether the value of an asset will rise or fall between the moment the contract is opened and when it’s closed. If they are right, the broker will pay them the difference.
These kinds of agreements allow those trading them to benefit from changes in price, without having to buy or own the underlying asset. In fact, the CFD doesn’t even consider the value of the asset, rather focussing on changes in value between one point in time and another.
So what are the differences between trading CFD indices and CFD stocks?
CFD trading indices
An index is a mechanism used in trading, be it stocks, assets, commodities, or currencies. Typically, an index will comprise a group of assets. They could be similar in type, from the same region, valued between certain parameters, or even a more random assortment. For example, you could have an index based on US top-performing companies, or global tech companies. The FTSE 100 Futures is a great example, as it includes a group of companies that are the 100 most highly capitalized blue-chip companies on the London Stock Exchange. The performance of an index such as the FTSE 100 can be compared with equivalents to give traders an insight into how different economies and sectors are performing
Indices can also be used in CFD trading. The trader or investor can speculate on the opening and closing value of various indices, regardless of where they are or what kind of assets they categorize.
CFD trading stocks
Most companies are split up into what is known as shares. Each of these shares represents a slice of the company and its value. If a company is publicly traded, these shares can be bought, sold, and traded on a stock exchange such as the FTSE 100. The value of each of these shares, or stocks, is influenced by currency values, economic factors, political events, social situations, and many other things. This means that traders can purchase, profit from, or speculate on the value of stocks. Typically this is done via a broker who facilitates the purchase of the underlying asset or in the case of CFDs, the contract.
When you engage in CFD trading of stocks, you speculate on the change in the value of certain companies, for example, Apple, Facebook, and Walmart. You do not purchase the stocks themselves.
Differences between the two
There are a number of differences between trading CFD stocks and CFD indices. Which of the two you prefer will depend on your aim and personality.
Stocks are more volatile. Typically stocks can rise and drop in value by more, and more quickly than an index of multiple stocks. They are also more likely to be influenced by a wider range of external social, economic, and political factors. Indices still move frequently in value, but it tends to be less volatile as you have a balance between a large number of companies.
In terms of research time, trading stocks is easier. This is because you only have to research and stay on top of one company as opposed to more. That said, if you want to trade indices, you just need to pay attention to historical data on the index as a whole, and the general market sentiment. Of course, analyzing every possible will help you get better insight, but it’s not necessary.
In conclusion, when it comes to indices and stocks, there isn’t one that’s better than the other. Each type of trading will appeal to different kinds of traders.
Disclaimer: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.