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CFD Trading vs Share Trading

Written By

James Barra

Written By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

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Edited By

Jemma Grist

Edited By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

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Updated

Jul 24, 2024

Both CFD trading and stock trading provide a means of trading on price movements in markets. But which instrument should you use? To answer the CFD trading vs share trading debate, we’ll inspect the differences.

Quick Overview

What Is CFD Trading?

With online CFD trading, you speculate on prices derived from an underlying security, without actually owning the underlying asset.

For example, let’s say you think the value of Facebook shares are going to rise. You could purchase a CFD stock from your broker at the current market rate. If the value of Facebook stocks then climbs, you could sell your CFD at the new, higher price. Your broker would then return the difference to your account.

For detailed guidance on the best CFD trading strategies and brokers, see here.

What Is Share Trading?

Stock and shares trading is the buying and selling of physical company shares. Returning to our Facebook example, if you think the price is about to rise, you could buy 10 Facebook shares. Then if their value does increase, you could sell them and close the trade.

For detailed guidance on stocks, including strategies and top providers, see here.

CFD Trading Vs Stock Trading

Ownership

There are some clear differences when it comes to CFD trading vs real stock trading. Most notably, you do not own the underlying asset with CFD investing while you do when dealing in shares. This means that with FTSE CFDs, for example, you can benefit from price fluctuations without entering a legal contract to own any shares and equity in companies.

Finance

Another key difference between CFDs and stocks is the ability to finance trades. With CFDs, you can trade on leverage, meaning for a small outlay, you can substantially increase your position by borrowing the remaining capital from your broker. Margin requirements are usually between 5% and 25%.

Let’s say you wanted to buy Apple stock at $500 per share. If you bought five physical shares, you’d need $2,500. But if you bought five CFD stocks with a 5% margin, you’d only need to put down $125. Not only would this leave you with more capital to invest elsewhere, but it means you’ve increased your position by twenty-fold.

This could seriously enhance profits. But while the benefit of leverage is the ability to magnify profits, losses too can be amplified. Opt for share dealing and you can’t lose more than your initial deposit.

Markets

Another distinction to consider when looking at CFD trading vs share trading is market access. You can trade a wide range of instruments with CFDs, from shares and indices to forex and cryptocurrency. With stocks, you are limited to investments in shares and ETFs only.

Fees

There are fees regardless of whether you opt for share trading or CFD trading. With stocks and shares, you usually pay a commission on all trades. Also, there may be a currency conversion charge on international trades. With CFDs, there will normally be spreads on all markets apart from shares. With CFDs on shares, most brokers charge a commission.

Cash Settlement

With share positions, it can take a couple of days for a trade to settle. In CFD investing, there is no settlement period. Profits and losses are normally available as soon as you close out a position. As a result, you can promptly reinvest capital into your next position.

Taxes

Presented with the choice of CFD trading or share trading, take into account the tax implications. With CFDs, in the UK for example, you do not pay stamp duty as you don’t actually own the underlying asset. CFD profits are, however, subject to capital gains tax. In stock investing, stamp duty is payable and so too is capital gains tax.

Note that the tax treatment of CFD or Stock trading can vary greatly between different countries. We can’t cover all those differences in this article, so make sure you check with your local tax office before engaging in any trading activities.

Hedging

Stock investing is not suitable for hedging. But CFDs can be used to hedge share positions. CFDs allow you to go short, so if the market price falls, any loss in your share position can be offset by profits made through your opposing short CFD position.

Check that your broker permits hedging prior to trading.

Market Hours

As CFDs give you access to thousands of markets, including index funds from across the world, you can effectively trade 24 hours a day. With shares, you can only buy and sell during stock exchange trading hours.

Short-Term Vs Long-Term Strategies

For short-term intraday and day traders, CFDs are arguably the better product. For long-term investments, stocks and shares are considered the better choice. That isn’t to say, of course, that profits can’t be made from day trading stocks and shares.

Platforms

Platforms shouldn’t play too much of a role in the CFDs vs stocks consideration. Both instruments are available through desktop and mobile devices. Brokers offer bespoke and popular software, including arguably the best platform – MetaTrader 4 (MT4). Direct market access (DMA) platforms are also available with both.

Shareholder Privileges

CFDs do not grant investors any shareholder privileges. Equity shares, on the other hand, bring with them voting rights on company issues. This extra influence can be particularly useful if stocks form part of a longer-term investment strategy.

Dividends

Dividends also play a part in the CFD trading vs share trading debate. Opt for CFDs and positions are adjusted for changes from dividends. With stocks, you’ll receive dividends directly, if paid.

Long & Short Opportunities

With stockbroking, you can only trade on rising prices. With CFDs, you can take both long and short positions.

Expiries

There are no expiry dates with shares. CFDs also don’t have expiries, aside from futures and options.

Which One is Best For Me?

CFD trading and share trading each have their benefits. For less experienced traders, shares are straightforward and less risky. For experienced traders with a strong grasp of the financial markets, leveraged CFDs can be lucrative. CFDs also open the door to a range of markets beyond stocks and shares.

If you’re not sure whether to go with CFD trading or share trading, why not try both? On many platforms, you can switch from an open stock position straight to a CFD. A demo account is also a fantastic way to trial both products before reaching into your pocket.

For further reading, please see our sections on CFD Trading and Stock Trading.

FAQ

Should I trade CFDs or stocks?

CFD trading and share trading each have their own merits. If you’re looking for a riskier product that requires minimal outlay and opens the door to a range of markets, then CFDs could be the right option. For less experienced traders who don’t want the risks that come with leveraged trading, then share trading may be more sensible.

Is CFD trading cheaper than share trading?

Because CFDs are a leveraged instrument, you only need a small amount of capital to open a position, whereas you need the full share price to buy a physical share. With that said, your total exposure is the same with both. And while the nature of the fees is different, both share trading and CFD trading come with costs.

Are CFDs subject to the same settlement period as shares?

No – the cash settlement period with CFD trading is automatic when you close out your position. In contrast, when share trading, it can take two days after a transaction is complete for profits and losses to appear in your account.

Can I use CFDs to hedge my share positions?

Yes – CFDs can be used to hedge against share positions. CFDs let you go short, so you can hedge against market volatility by opening an opposing position in the direction of your share trade.

How do I start CFD trading and share trading?

With both products, you’ll need to choose a broker, open a trading account and deposit funds into your platform. Once you’ve defined your risk parameters and have a strategy, you can take a position when you spot an opportunity in the market.

See our sections on CFD Trading and Stock Trading for the best brokers and other tips.