Contracts for Difference (CFDs) and stocks are two financial instruments that send trillions of pounds through global financial markets.
Stocks are traded through the London Stock Exchange (LSE) in the UK. The primary index is the FTSE 100, which is the 100 largest companies listed on the LSE.
CFDs are traded over-the-counter (OTC) directly with brokers and liquidity providers. They’re not traded like stocks: with CFDs, investors bet on price change outcomes.
That’s a basic overview of where the financial instruments are traded in the UK. Below, this beginner’s guide covers what CFDs and stocks are and some of the common mistakes beginner traders make.
What are contracts for difference?
A CFD is a derivative (a financial contract) that allows investors to bet on whether the price of an underlying asset will rise or fall. That asset can be a share, index, stock, commodity, or currency listed on a CFD trading platform.
There’s no ownership of the underlying asset, and profit or loss is based on the price movement speculated on between the opening and closing positions. The positions an investor bets on are either long (expecting prices to rise) or short (expecting prices to fall).
CFDs are typically leveraged. That means depositing a fraction of the total position value as a margin to increase market exposure, which can magnify losses and trading costs.
CFD trading costs can include:
- Bid-offer spread
- Commissions
- Overnight financing charges
With that in mind, the time a CFD position remains open can affect its overall cost.
CFDs are derivatives traded privately through individual brokerage CFD trading platforms, not through the LSE order book. Their volume reflects short-term retail trading.
Stocks and shares explained
Stocks and shares represent partial ownership in a company, which is referred to as being a shareholder. Despite being a shareholder, it’s not possible to trade on changes in the company’s share price. That’s decided by the continuous interaction of buyers and sellers in the stock market through supply and demand
It’s possible to earn returns through capital appreciation if share prices rise or through dividends if that’s how the company opts to distribute part of its profits. That said, dividends aren’t guaranteed.
Depending on the class of shares, it’s possible to receive voting rights, which allow investors to vote on corporate decisions.
Shares don’t automatically multiply market exposure, and prices can fall substantially. For example, in April 2026, the deputy governor of the Bank of England said global stock markets were too high and warned that they could fall. If that happens, it’s possible to lose money on investments. Stock value can also fall if a company performs poorly or fails.
That said, the opposite can happen, and as share prices rise, so can the value of an investment. That’s why it is so important to learn about risk management and understand the stock market and the performance of individual stocks before investing.
Common mistakes beginners make when trading CFDs and stocks
It’s easy to make mistakes as a beginner with any financial instrument. Here are the most common mistakes new traders make with CFDs and stocks:
- Using too much leverage with CFDs, like misinterpreting leverage as only controlling a larger position and not the fact that it can magnify losses.
- Trading without understanding the product, like confusing buying a stock with trading a CFD on that stock.
- Risking too much on a single trade.
- Ignoring trading costs like spreads and commissions.
- Making decisions based on hype or social media tips.
Trading on demo accounts can help beginners understand how each financial product works and how to use risk management tools such as stop losses and trailing stop orders.
Adding CFDs and stocks to a trading portfolio can help create diversification and manage spread risk. Before starting trading, traders should always research trading and risk management strategies.
Disclaimer
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
Leave a Comment