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When investing in shares a trader has two major options. One option is to purchase actual shares in companies on different exchanges where they are listed; this is known as share trading. For example, you can purchase Apple shares on the NASDAQ stock exchange, meaning you will have a stake in the company.

The alternative to buying shares is CFD trading on shares. A trader can purchase a contract for difference (CFD) on a particular equity, speculating of the price difference of an underlying asset (in this case a share) without having to own it. 

CFD vs Stocks

A CFD is a derivative product where a broker typically agrees to pay an investor the difference in the value of a security between an opening and closing price. Traders can open long positions (speculating that the price will rise) or short positions (speculating that the price will fall).

Traditional share trading is known as a more long-term approach to investing, where the trader is usually expecting the price to rise over a time frame of months to years. While CFD trading tends to be considered a short-term investment, where trades are opened and closed within day to week timeframes.

 

Major differences between CFD and share trading

The key difference between CFD trading vs share trading is that with a CFD you don’t take the ownership of the underlying stock. You just speculate on its price movements, which makes it a more flexible trading option. CFDs give you an opportunity to benefit from the asset’s upward or downward movement. 

Another vital difference between taking a long position with a CFD and purchasing a security is the ability to make leveraged trades. CFDs are traded on margin, which means that a trader can open larger positions relative to the amount of initial capital they have.

Exploring the benefits of CFD trading vs stock trading, you can find that both types offer different ways to take advantage of price movements in financial markets and both can make a part of your portfolio. Take a closer look at the table below and decide, which works best for you now.

Contracts for difference (CFDs)Traditional shares
Trade CFDs using leverage to gain greater exposure with your initial capitalPay the full value of your trade up front
CFDs are exempt from stamp dutyWhen you buy shares, you pay stamp duty of 0.5% on the transaction
With CFDs, you can open a long or short position, so you can profit from rising and falling marketsWhen purchasing shares, you can only profit from rising prices
Trade a variety of financial instruments across shares, indices, commodities, currencies and cryptocurrenciesTrade equities only
Trade at all hours on numerous marketsTrade only during stock exchange opening hours
No shareholder privilegesReceive shareholder privileges

Example of CFD vs share dealing

An example can help you better understand how CFDs vs stocks trading works in practice. Let’s make a comparison of a share CFD vs share deal in a simplified breakdown of buying Apple.

Buying Apple

 CFD tradeShare trade
Sell / Buy Price135.05 / 135.10135.05 / 135.10
DealBuy at 135.10Buy at 135.10
Deal size100 shares100 shares
Funds required to open a trade$ 2,702 = $135.10 Buy price x 100 shares x 20% margin (Margin required)$13,510 (100 shares at 135.10)
Close priceSell at 150Sell at 150
Profit$1,490
((150 - 135.10) x 100 shares = $1,490)
$1,490
(15,000 – 13,510 = $1,490)

Another example can show you how leverage may significantly increase possible profit or loss, since you can buy more shares with leverage than without it. Let’s assume that you have $3,000 to trade Apple stock:

Buying Apple

 CFD tradeShare trade
Sell / Buy Price135.05 / 135.10135.05 / 135.10
DealBuy at 135.10Buy at 135.10
Funds available (Balance)$ 3,000$3,000
Leverage5:11:1
Deal size100 shares20 shares
Funds required to open a trade$ 2,702 = $135.10 Buy price x 100 shares x 20% margin$ 2,702 = $135.10 Buy price x 20 shares
Close priceSell 100 shares at 150Sell 20 shares at 150
Profit$1,490
(14.9pt increase x 100 shares = $1,490)
$298
(14.9pt increase x 20 shares = $298)

Please note that CFD allows trading with leverage, which may magnify either profit or loss, i.e. come with a high risk of losing or gaining money rapidly.

In this example, when the price goes down, for example to $130, on a Share trade you may lose only $102 (5.1pt decrease x 20 shares), while on a Leveraged CFD trade you may lose 5 times more – $510 (5.1pt decrease x 100 shares).

Comparing CFD trading and shares trading


Analysing the differences of CFDs vs stocks you should understand what exactly you are doing in each case and consider the options you have.

 CFD tradingShare trading
What is it?Trading a contract, on margin, where the value is derived from an underlying asset, which you do not ownThe buying and selling of deliverable shares in a company on an exchange
What kind of trading is it suitable for?Suitable for intra-day, day, and medium-term tradingMore suitable for long-term trading
Do I pay to keep positions open?There is a charge levied for keeping CFD positions open overnightNo
Range of marketsYou can trade CFDs across shares, indices, currencies, commodities and cryptocurrencies, with 2,000 to choose from on Capital.com’s platformCapital.com offers 1,700 equities to trade with CFDs

Is CFD trading cheaper than share trading?

With CFD trading, you are only required to pay a fraction of the upfront value of your trade, known as the margin, which means you can access a position of equivalent size in the stock market for less money. When you buy a physical share you are paying for the full cost of the asset upfront. This, however, does not mean your total exposure is any different with either method. While leverage can amplify profits, it can also amplify losses.

The costs associated with CFDs and share trading also differ. When trading CFDs with Capital.com, you do not get charged any commission; you simply pay the spread and any associated overnight fees. However, with shares, depending on your broker, you will probably be charged commission, and you have to pay the stamp duty exercised on the security.

Can I use CFDs to hedge my existing share portfolio?

CFDs provide an excellent insurance opportunity to hedge your existing portfolio due to the fact that you can sell short, speculating on a price downtrend. Say, for example, that you have an existing portfolio of blue chip shares. You want to hold them for the long term, but you feel as if the market is about to witness a short dip, and you are concerned about how this will affect the value of your portfolio. With leveraged trading, you can short-sell this market in order to hedge against this possibility. If the market slides, what you lose on your portfolio can be offset by the gain from your short hedge using CFDs. If the market rises, you will lose on your hedge but gain on your portfolio.

Why CFDs?

 
Leverage

The principal selling point of CFDs is that you can trade them on margin, which is known as leveraged trading. When you trade on margin you only need to put down a fraction of the value of the initial outlay and you effectively borrow the remaining capital from your broker. Leverage provides greater exposure with a smaller deposit, making global markets more accessible.

 
Speculation

People trade CFDs to capitalise on price movements in the short-term. It is often called ‘swing trading’ and it tends to happen on both bullish and bearish markets. You don’t need expansive research or deep market analysis to trade CFDs. The tricky thing is that it is sometimes very hard to specify the exact date or moment when a price adjustment will come to an end.

 
Short selling
Short selling is one of the major advantages of CFDs over classic long-term investment in shares. With contracts for difference you can benefit from both a rising and a falling market. If you open a short trade when a stock is falling in value, you can benefit from the dip in price. It makes contracts for difference a more flexible type of trading, compared to traditional share trading.
 
Greater access to financial markets

Contracts for difference offer unlimited access to various financial markets, in which it might be difficult to gain exposure through traditional share trading, for example, emerging or overseas markets). CFDs allow traders to choose and speculate on price swings of the world’s most-traded equities, commodities, indices, currency pairs and even cryptocurrencies through one single trading platform here at Capital.com, saving money and time. 

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.2% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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