Article sponsored by AvaTrade
How can we successfully distinguish the strengths and advantages of these two financial products? What to choose according to your own investment strategy? Discover some answers and get more information on the instruments available through the services of AvaTrade France.
What is a classic securities account?
Securities accounts or “ordinary securities accounts” are financial products intended for investing in the stock market. These generally take the form of a current account or “cash account”, which can be opened with any financial institution (banks, but also specialized brokers and online brokers). They therefore make it possible to invest on the markets with several transferable securities (such as shares, bonds, subscription warrants, rights, SICAVs, ETFs and other derivative products). These operations can take place on the French, European or international markets.
Flexible but risky investments
At this stage, note the extreme flexibility of the securities account, which makes it possible to invest in practically all asset classes, in all company sizes and in all geographical sectors – this, unlike the PEA, which does not allow investment in companies that are not listed on European stock exchanges.
The securities account gives a trader the opportunity to hold actual ownership of the securities purchased: in other words, you buy and sell shares with an exact monetary value. However, beware of the other side of the coin, as some investment vehicles can be extremely risky. The amount of losses may be greater than the amount of investments made. A real expertise is therefore required before launching.
What is Contract for Difference?
The contract for difference or “Contract for Difference” (CFD) refers to a contract concluded between a trader (you!) and a broker-type platform. This contract is indexed to a share or an index (the underlying). You therefore do not hold any shares directly. When closing a position, both parties agree to settle the difference.
One of the main characteristics of CFDs is “margin trading”, allowing the trading of “derivative” financial products with a leverage effect. This practice can be likened to a kind of loan, allowing you to invest larger sums of money than the funds deposited in your trading account. Leverage or “short selling” can therefore be perceived as a multiplier of gains or losses depending on the situation.
Leverage in detail
In other words, CFD trading gives you room to speculate as prices move up or down. If the prices of the financial product you have chosen move according to your predictions, you win money. Conversely, you realize a loss. Constant fluctuations can increase risks, hence the importance of knowing how to manage your capital well from the outset.
CFD trading contracts thus allow you to bet on “underlying assets”, linked by definition to derivatives. These assets are, for example, indices, currencies, commodities and stocks. In other words, you are not the owner of the securities on which you speculate. You will have understood it, through these few lines: CFD trading involves significant risks, especially in the short term: indeed, it is very difficult to predict the evolution of an underlying asset. Hence the importance of entrusting your investment project to a qualified online partner like AvaTrade.
What are the advantages of the CFD compared to the securities account?
First, remember that the securities account and the contract for difference share similarities: they are first and foremost financial products, allowing speculators or investors to generate capital gains on price fluctuations. of certain financial assets. Thus, a single investor has the possibility of holding these two products, within the same investment portfolio. Unlike the securities account, the CFD does not offer you the possibility of holding the real ownership of the underlying assets. As a trader, you therefore do not obtain any rights to these assets.
However, CFD trading has several advantages:
- You trade on margin: this means that you bet large amounts, from a relatively small capital investment. This is made possible thanks to the leverage effect. In fact, your capital is not blocked in a single position, you have the possibility of using it to manage other investments.
- You trade on all financial markets (Forex, commodities, cryptocurrencies, etc.).
- You trade when you want: you are not subject to the trading hours of local exchanges, and you can trade currencies 24 hours a day.
The special advantages of AvaTrade
AvaTrade is a trading platform with an excellent online reputation: this broker specializing in derivatives allows anyone, beginner or experienced, to access a large number of financial products (more than 600 in total!). Access to AvaTrade is through 4 platforms, each tailored to each level of user. As soon as you register, you get a bonus and access to AvaTrade Demo to familiarize yourself with the platform’s features.
CFDs are complex instruments that carry the high risk of losing money quickly due to leverage. 76% of retail investment accounts lose money trading CFDs with this provider. You should determine if you understand how CFDs work and if you can afford to lose your money.
Superb post but I was wondering if you could write a litte more on this subject?
I’d be very thankful if you could elaborate a little bit further.
Thanks!