Trading vs investing
Two ways to take part in the markets. Investors buy and own assets for the long term. Traders aim to gain from price moves, often with CFDs.
Two ways to use the markets.
The difference is mostly about time, ownership and leverage.
An investor buys an asset, such as a share or a fund, and holds it for years. The return comes from growth in value, and sometimes from dividends or interest.
A trader aims to gain from price moves over shorter periods. With CFDs, a trader can go long, buying to gain from a rise, or short, selling to gain from a fall. Leverage lets a deposit, called margin, open a larger position.
Both carry risk. Investments can fall in value, and leveraged trading can lose money quickly.
Side by side.
How trading CFDs compares with buying the asset itself.
| Investing | Trading CFDs | |
|---|---|---|
| What you hold | The asset itself, such as a share | A contract on the asset’s price |
| Typical time frame | Years | Minutes to months |
| Going short | Not in a standard account | Yes, in the same way as going long |
| Leverage | None in a standard account | Yes, up to a maximum set by the broker |
| Votes and dividends | Yes, as a shareholder | No votes. Dividends may be adjusted in cash |
| Overnight cost | None for holding the asset | Swap, charged or paid each night |
| What you can lose | What you paid | Can exceed the margin you set aside |
The other side of the deal differs too. An investor usually buys on an exchange through a broker. A CFD is a contract with your broker, and at Clarity, Clarity is the counterparty to your trades.
How the costs compare over a year.
Suppose you want $10,000 of exposure to a share for one year. For this example only, suppose a share CFD needs 20% margin.
The investor pays $10,000 for the shares. The CFD trader sets aside $2,000 of margin for the same exposure, and pays swap on the full position.
Suppose the swap works out at $1.50 a night. Over 365 nights, that is $547.50. Dealing costs are left out to keep the numbers clear.
| Buy the shares | Share CFD | |
|---|---|---|
| Money set aside | $10,000 | $2,000 margin, at 20% |
| Exposure | $10,000 | $10,000 |
| Financing for one year | None | 365 × $1.50 = $547.50 |
| If the share rises 10% | +$1,000 | +$1,000 − $547.50 = +$452.50 |
| If the share falls 10% | −$1,000 | −$1,000 − $547.50 = −$1,547.50 |
The CFD uses less money up front, but the swap adds up. That is why CFDs tend to suit shorter holding periods better than long-term investing.
A 10% fall costs the CFD trader half of the $2,000 margin, before swap. Leverage magnifies losses as well as gains.
Which suits you?
Questions to ask yourself before you choose. Some people do both.
Decide your time frame.
Money you will not need for years points towards investing. Short-term views on price point towards trading.
Be honest about your time.
Trading needs regular attention. Long-term investing needs much less day-to-day work.
Set the amount you can lose.
With leverage, losses can build quickly. Only trade with money you can afford to lose.
Practise before you commit.
Try trading on a demo first, so you know how it feels before real money is involved.
Common mistakes.
Where people mixing up the two most often go wrong.
Using CFDs as a long-term investment without counting swap. Over years, it can outweigh the gain.
Assuming a CFD gives you a shareholder’s rights. It does not include ownership or votes.
Bringing a trader’s leverage to an investor’s time frame. A long hold with high leverage has to survive many swings.
Judging a long-term investment by its daily moves. Short-term noise is part of holding any asset.
Questions, answered.
What people ask most about trading and investing.
01Is trading riskier than investing?
02Can I invest with Clarity?
03Do CFD traders receive dividends?
04Can I go short when investing?
05Can I practise trading first?
Try trading on a demo.
See how trading CFDs feels on a free MT5 demo, with live prices and practice money, before you decide.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.