Discover what stock trading is and how to trade CFDs

Understanding what is stock trading and learning how to trade stocks are foundational steps for anyone looking to venture into the dynamic world of the stock market. Millions of eager novices dive into the trading arena annually, but many fail to realize their trading potential due to a lack of knowledge and guidance. Yet, those willing to dedicate time to acquire the necessary skills may find themselves better equipped to navigate the markets and improve their chances of success.

Trading stocks is not easy and requires a smart plan and a strategic understanding of the movements within the financial markets. Rather than following quick money-making schemes and promises from self-proclaimed gurus, it is important to build a robust knowledge base and develop the ability to trade with confidence and insight. 

This guide aims to clear up the confusing parts of the process by tackling key topics such as the differences between trading stocks and buying shares, how stock trading works, and the tools and strategies that can empower you to make informed decisions. 

What is CFD stock trading?

At its core, CFD (Contracts for Difference) stock trading involves buying and selling contracts that mirror the performance of stocks without owning the underlying assets. This type of trading takes place through an online brokerage where CFDs are bought and sold based on speculation about the future price movements of stocks. Unlike traditional stock trading, which involves buying and holding shares through a stock exchange, CFD trading allows for quick entry and exit from positions, providing the flexibility to capitalize on both rising and falling markets.

To engage in CFD stock trading, one must first open a brokerage account with a firm that offers CFD services. Once the account is set up, traders can buy and sell CFDs on a wide range of company stocks, tapping into the market's volatility. This trading strategy is particularly appealing for those seeking short-term profits, enabling traders to leverage their positions and potentially amplify their gains. However, it's important to note that increased leverage raises the risk of higher losses, so understanding the market and managing risk is crucial for CFD traders.

Trading styles for CFD stock trading

When trading CFD stocks, understanding the various trading styles is crucial. Each style demands a different level of market engagement and caters to diverse risk appetites and lifestyle needs. Whether you're looking to make quick trades or invest for the long haul, it's essential to recognize which method aligns with your financial goals and the time you can afford to dedicate to the market. Let's explore the three prominent styles of CFD stock trading: position trading, swing trading, and day trading.

Position trading stocks

Position trading is for the long-term strategist who prefers to ride out the waves of the market for months or even years. This method involves buying and selling stocks with the goal of benefiting from long-term trends. As a position trader, you're less concerned with short-term fluctuations and more focused on the potential for substantial growth over time. This long-term approach allows you to base your trades on a thorough analysis of the company's fundamentals combined with a broad view of market trends. It's a style well-suited for those with a long-term horizon and who prefer a less hands-on tactic to trade in the market.

Swing trading stocks

Swing trading is a flexible style for those who seek to capture gains in the market over a period ranging from a few days to several weeks or months. It involves buying and selling stocks to take advantage of short- to medium-term price movements. Swing traders need to stay relatively engaged in the market, as this approach requires monitoring of the ongoing trends to buy low and sell high. While it demands less constant attention than day trading, swing trading still requires a good grasp of market dynamics and the ability to act swiftly when the opportunity arises.

Day trading stocks

Day trading is the most active trading style and is not for everyone, especially if you're risk-averse or cannot dedicate time to continuous analysis of the market. It involves buying and selling stocks within the same trading day, capitalizing on small price movements. Day traders must keep a constant eye on the market, as this high-octane style involves making quick decisions and requires a significant commitment during trading hours. Although it can be profitable, it's a style that comes with high stress and is best left to those who thrive in fast-paced environments and can manage the associated risks.

The difference between CFD trading and investing stocks

The difference between CFD trading and investing in stocks is primarily rooted in the strategies and timeframes when handling a stock. When you trade CFDs, you are mostly engaging in short-term transactions that capitalize on the price movements of shares (stocks) without actually owning them. In essence, CFD trading involves buying and selling contracts that mirror the price fluctuations of a stock, allowing traders to speculate on whether the value of these stocks will rise or fall. This derivative form of trading enables participants to buy or sell shares, usually in the short term, often benefiting from leverage, which can amplify both gains and losses.

On the other hand, investing in stocks is typically a long-term approach where an investor buys shares with the intention of holding them for an extended period, aiming for the value of their investment to grow alongside the company's success. Trading stocks involves buying shares through stock exchanges, like the New York Stock Exchange, with the hope that the price of a stock will increase over time, yielding a profit when sold in the future. Unlike CFDs, investing in a stock grants the investor ownership of a portion of the company, often entitling them to dividends and sometimes voting rights. For beginners, investing in stocks may seem more straightforward since it involves directly owning a piece of the company and waiting for the gradual appreciation of shares, rather than engaging in the more complex, short-term speculation associated with CFD trading.