For the new guy, CFD stocks and the traditional stocks may appear like the same thing, but they are not! CFD stocks are not actual stocks but are stock derivates that allow people to go short or long. Furthermore, a person only speculates on the direction of the stock movement and at no point owns any stock at all. Another difference between CFD stocks is that one can trade with borrowed money which allows people to open big positions.
CFD Stocks Vs. Traditional Stocks
If we look at the traditional stocks, it offers actual ownership of the stock, and when a trade is made, a person is not just speculating on the direction of the stock. Furthermore, a person can only go long in traditional stocks, and there is no option to go short. Another key difference is that a person can only invest with the money present in their account (no borrowing or leverage).
Based on these differences, it becomes clear that CFD stocks carry a high degree of risk as compared to traditional stocks. Since most of the trading in CFD stocks is done through leverage, it multiplies the profit/loss many times, which can even wipe out entire accounts.
If we look at the traditional stocks, a person can only lose the money they invested in a stock. And that too only happens when the stock value hits $0, which is a very rare occurrence these days!
Example Of CFD Stocks
Let's assume that you think Microsoft's share price will increase in the near future. With $100 in your account, you use the leverage provided by your broker to open a position worth $10,000 in Microsoft stock. Since it is a CFD, you are only betting on the price of Microsoft stock and will not own any piece of stock at all.
If the price of Microsoft stock rises, your CFD position will be in profit based on the $10K position you just opened. However, if the Microsoft stock drops down from your trading price, the loss will be based on the $10K position as well!