There are many different ways to enter the stock market, and not all of them involved the traditional methods of buying and selling.
While ownership of stocks and shares can be highly beneficial, it’s not as flexible as other options and may have greater tax implications. If you want to avoid these complications, you could opt for alternative stock market investments.
One of the most popular of these is CFDs, Contracts for Difference. Without ever owning the underlying stock, investors can speculate on price changes and reap the rewards if their prediction is correct. To the untrained eye, this may seem no different from gambling, but that’s not the case.
Here’s a closer look at the difference between CFD and gambling; and why it’s so essential to understand this.
An Investment, Not Gambling
Any stock market investment involves an element of risk. Some types of investment are more volatile than others; this means they attract a higher risk but potentially could deliver a higher return.
However, just because an investment has some risk doesn’t mean it qualifies as gambling. This is the case with CFDs, a bona fide form of investment subject to proper financial regulation. You can find guides for CFD trading in your country, along with information about adequately managing risk.
You should never trade with money that you can’t afford to lose, but there are ways to mitigate the risk. This is where CFDs are very different from gambling. The latter is purely based on luck, while CFDs require a degree of skill, knowledge and experience to help achieve the best results.
The Importance of Making a Distinction
You might be wondering whether it really matters how CFDs are viewed, as there’s no way to mitigate the risk altogether.
Understanding that CFDs are different to gambling is very important to those who are just starting out. Giving the impression that a CFD investment is nothing more than a spur-of-the-moment bet could lead to rash transactions being made, without any research. These types of trades are more liable to lose money, so a misunderstanding about how much knowledge is required can be a painful lesson to learn.
The reality is that learning about the specific market and the factors that influence price can help any investor make more accurate predictions. Stop loss orders can help to minimise losses if the market begins to move in the wrong direction.
All of these things mark out CFDs as being very different from gambling and underscore why it’s essential to understand the difference.
Want to Find Out More?
If you’ve heard of CFDs, you can find out more before diving into the market. Doing your research from trusted brokers will enable you to learn the facts before starting to trade. The best brokers provide a range of training guides to help you when you’re just starting out. These can be an invaluable introduction to trading, helping you avoid the pitfalls common for new traders.
FAQs
You should never trade with money that you can't afford to lose, but there are ways to mitigate the risk. This is where CFDs are very different from gambling. The latter is purely based on luck, while CFDs require a degree of skill, knowledge and experience to help achieve the best results.
Is CFD basically gambling? ›
CFD trading and gambling are two distinct activities. Whilst commonalities may exist as far as speculation is concerned, the one is not the same as the other. But to understand the differences requires having a fundamental understanding of both concept.
Why is CFD banned in the US? ›
Why Are CFDs Illegal in the U.S.? Part of the reason why a CFD is illegal in the U.S. is that it is an over-the-counter (OTC) product, which means that it doesn't pass through regulated exchanges. Using leverage also allows for the possibility of larger losses and is a concern for regulators.
Which is better gambling or trading? ›
Investing and gambling certainly both involve risk and choice—specifically, the risk of capital with hopes of future profit. But gambling is typically a short-lived activity, while equities investing can last a lifetime. There is also a negative expected return to gamblers on average and over the long run.
Can you make a living from CFD trading? ›
Firstly – CFD trading is hard.
It's possible to make money trading CFDs with experience and a thorough understanding of how the financial markets work. But, it's well known that around 75% of retail traders (private investors) lose money when trading CFDs.
Why is CFD banned? ›
The ban aims to address concerns about leverage and protect investors from potential losses. While CFD trading is prohibited for US citizens, US brokers can offer CFDs to residents of other countries.
Where is CFD trading illegal? ›
CFDs are illegal in the US and Hong Kong but in other countries, they can be traded under strict regulations. In such countries as Austria, Cyprus, France, and Australia, CFD trading is legal but certain regulations are in place to protect the parties involved.
Can a US citizen trade CFDs? ›
No. CFD trading is illegal for US citizens and residents. Additionally, most CFD brokers don't accept US citizens or US residents as clients. CFDs are illegal in the US because they are an over-the-counter (OTC) trading product.
Why is CFD trading so hard? ›
This requires constant vigilance of the market and price movements. As well as the use of effective risk management to safeguard funds. Some of the most popular risk management tools used in CFD trading are stop-loss and take-profit orders.
How many people lose money in CFD? ›
As it has been proven, historically, most people who start online trading fail. The European Securities Markets Authority (ESMA) reported that between 74% and 89% of all new CFD traders lose money.
The main difference between day trading and gambling is that gamblers play available odds while traders strategize based on market trends, price movements, and past performances.
Why is day trading like gambling? ›
It's fair to say that day trading and gambling are very similar. The dictionary definition of gambling is "the practice of risking money or other stakes in a game or bet." When you place a day trade, you're betting that the random price movements of a particular stock will trend in the direction that you want.
How much money do I need to trade CFDs? ›
CFD margin requirements can vary depending on the market that you're looking to take a position on – and not all of our markets will have the same margin rate. For example, we require a deposit equal to 5% of the total position size on popular indices like the FTSE 100, or 20% on shares such as Tesla.
How much do CFD traders earn? ›
Large Account, Significant Profits:
A trader with a $50,000 account who consistently achieves a 15% return on their trades would earn an average of $7,500 per month. This could be enough to support a comfortable lifestyle or provide substantial financial freedom.
How many CFD traders are successful? ›
Most CFD traders do not have a high success rate. In fact, 82% of CFD traders lose money and the average loss amounts to £2,200 when trading these products.
Is trading basically gambling? ›
Playing the stock market could be the same as going to a casino if you buy stocks randomly on a whim or based on rumors. However, a diversified well-researched portfolio or even passively investing in a broad stock market index has a positive expected return and will grow your wealth over time.
Can you lose money with CFD? ›
CFD trading, like any other form of online trading, involves risk. While a percentage of traders may gain profits and celebrate the rewards of CFD trading, a considerable percentage incurs losses. As it has been proven, historically, most people who start online trading fail.
Is CFD normal trading? ›
CFDs work by mimicking the underlying market. So, while you can mimic a traditional trade that profits as a market rises in price, you can also open a CFD position that will profit as the underlying market decreases in price. Say, for example, that you buy 5 FTSE 100 contracts when the buy price is 7500.
