Article sponsored by AvaTrade
How can we successfully distinguish between the strengths and advantages of these two financial products? What should you choose according to your own investment strategy? Discover some answers and get more information about the available instruments through the services of AvaTrade France.
What is a classic securities account?
Securities accounts or “ordinary securities accounts” are financial products intended for investment in the stock market. These generally take the form of a current account or “cash account” which can be opened at any financial institution (banks, but also specialist brokers and online brokers). They therefore make it possible to invest in the markets with several negotiable securities (such as shares, bonds, warrants, rights, SICAVs, ETFs and other derivative products). These operations can take place in the French, European or international market.
Flexible but risky investments
Note at present the extreme flexibility of the securities account, which allows investment in virtually all asset classes, in all company sizes and in all geographic sectors – this in contrast to the PEA, which does not allow investment in companies not listed on European stock exchanges.
The securities account allows a trader to have 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 instruments can be extremely risky. The amount of loss can be greater than the amount of investments made. Real expertise is therefore required before launch.
What is Contract for Difference?
The contract for difference or “Contract for Difference” (CFD) refers to a contract entered into 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 own any shares directly. When a position is closed, both parties agree to settle the difference.
One of the main characteristics of CFDs is “margin trading”, which allows the trading of “derivative” financial products with a leverage effect. This practice can be compared to a kind of loan that allows you to invest larger sums than the funds deposited in your trading account. Leverage or “short selling” can therefore be seen as a multiplier of gains or losses depending on the situation.
Exploit in detail
In other words, CFD trading gives you room to speculate when 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, which is why it is important to know how to manage your capital well from the start.
Thus, CFD trading contracts allow you to bet on “underlying assets”, which by definition are linked to derivatives. These assets are, for example, indices, currencies, commodities and stocks. In other words, you are not the owner of the securities in which you are speculating. You will have understood it through these few lines: CFD trading involves significant risks, especially in the short term: it is indeed very difficult to predict the development of a underlying asset. That is why it is important to entrust your investment project to a qualified online partner like AvaTrade.
What are the advantages of the CFD compared to the securities account?
First of all, remember that the securities account and the CFD share similarities: they are primarily financial products that allow speculators or investors to generate capital gains on price fluctuations of certain financial assets. A single investor thus has the option of holding these two products within the same investment portfolio. Unlike the securities account, the CFD does not offer you the opportunity to hold beneficial ownership of the underlying assets. As a trader, you therefore obtain no 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 opportunity to use it to manage other investments.
- You trade in all financial markets (Forex, commodities, cryptocurrencies, etc.).
- You trade when you want: You are not subject to the opening hours of local exchanges, and you can trade currency 24 hours a day.
The special advantages of AvaTrade
AvaTrade is a trading platform with an excellent online reputation: this broker specializing in derivatives gives anyone, beginner or experienced, access to a large number of financial products (more than 600 in total!). Access to AvaTrade is through 4 platforms, each tailored to each user level. As soon as you register, you get a bonus and access to the AvaTrade Demo to familiarize yourself with the platform’s features.
CFDs are complex instruments that have the high risk of losing money quickly due to leverage. 76% of retail investment accounts lose money trading CFDs with this provider. You should decide whether you understand how CFDs work and whether you can afford to lose your money.