CFD vs share trading

• CFDs vs shares
• What’s the difference between CFDs and investing?
• How share trading works
• How CFDs work
• Benefits of CFDs
• How to start CFD trading
• Benefits of investing
• CFD vs investing example
• Which is best for me?
• CFDs vs share trading strategies
• FAQs

CFDs vs shares

Before we start looking at the differences between CFDs and shares, let’s look at the basics.

What are shares?

Shares are the units of ownership in a given company. When an individual buys shares in a company, they become one of its owners. Most individual investors can only buy shares of companies that are publicly listed on stock exchanges or when a private company offers shares in exchange for crowdfunding.

What are CFDs?

CFDs are contracts for difference, they’re derivative products that take their price from an underlying asset. Shares are just one example of an asset that can be traded with CFDs.

What’s the difference between CFDs and investing?

CFDs and investing – also known as share trading – are two separate ways to take a position on a market’s price movements. On the surface, that makes them seem similar, but they work in very different ways. Unlike investing, with CFD trading you don’t ever own the asset you’re trading.

How share trading works

When you invest in a market (such as a stock), you usually buy it and add it to your portfolio.

Then, when the time comes to close your position, you sell it on and collect the difference in its price as profit – unless you have to sell it for a loss.

How CFDs work

When you trade a market via CFDs, you don’t buy it and add it to your portfolio. Instead, you buy a contract for difference (CFD). This is a type of financial product that tracks the live price of a specific financial asset, such as a stock, index or forex pair.

When you close your position, you’ll exchange the difference in the asset’s price with your provider. If it’s gone up, you’ll earn a profit. If it’s fallen, you’ll earn a loss.

Learn more about how CFDs work.

As you can see, the result from both transactions is the same. Buying 50 Apple CFDs gives you the same exposure as buying 50 Apple shares. But because you never own the underlying asset with CFDs, you can access some useful benefits for active traders.

See how share CFDs work first hand

The best way to get to grips with share CFD trading is by diving in with a free risk-free demo account. These work just like live trading accounts, but all the money is virtual – so you can learn the ropes without risking any funds. All you need is an email address.

Get your demo account here

Benefits of CFD trading

Let’s look at three major benefits of CFD trading: leverage, going short and the range of available markets.

Leverage

When you buy a CFD, you don’t necessarily have to pay for the full price of your position upfront because they use leverage.

Let’s return to our Apple example above. If Apple is trading at $150, then buying 50 shares would cost $7,500. With investing, you’ll need to pay that full $7,500 to open your trade. With CFDs, you might only need 20% of your position’s price in your account – in this instance, $1,500.

Despite only putting down 20% of your position’s total value, your profit or loss is still based on its full size. So, you can earn 100% of a transaction’s gains – or losses.

Going short

So far, we’ve only looked at going long by buying markets with CFDs. But because you don’t own the underlying asset, you’re not limited to long positions with contracts for difference. You can go short by selling a market at the outset instead.

Shorting gives you a position that will profit if the underlying asset price falls instead of rising. It can be a useful method of targeting returns in bearish conditions.

It is technically possible to go short when share dealing. But for most investors, it’s a complex process that involves borrowing and reselling stocks. With CFDs, the process is the same as going long – you just choose ‘sell’ instead of ‘buy’.

Which markets can I trade?

With share trading, you can only access a narrow range of asset classes: typically shares and ETFs.

With CFDs, on the other hand, you can deal in a vast range of markets: commodities, stock indices, shares, ETFs and more. You can even trade on the prices of bonds, options and interest rates. 

For example, City Index offers over 6,300 global CFD markets. Using a single platform and account, you can take your position on Amazon, the ASX 200, gold and much more.

To see our full range of markets – and trade them risk free – open a demo account.

How to start share CFD trading

Follow these five steps to start trading share CFDs with City Index today:

1. Open a live account to trade CFDs with real funds or a demo account to develop your skills with virtual capital
2. Add funds using credit or debit cards, EFT, BPAY, PayID or PayPal.
3. Choose a market from the thousands available
4. Buy (go long) if you think your market’s price will rise or sell (go short) if you believe it will fall
5. Execute your trade, remembering to use stops and limits to control your risk

Benefits of investing in shares

CFDs are a powerful tool, but they aren’t for everyone. Let’s take a look at some key benefits of investing over CFD trading.

Lower risk

When you trade on leverage, you’re essentially amplifying your exposure without committing extra capital. While this has the potential to increase your profits, it will also increase your losses, which makes CFD trading riskier than investing – although you can limit your risk with stop losses and take profits.

Some companies choose to pay a share of their profits back to shareholders in the form of a dividend. With CFDs, this is credited in the form of a ‘dividend adjustment’ to those going long and debited from those going short.

If you’re planning a yield-based strategy, investing is probably the better option.

No overnight funding

When you keep a long CFD position open overnight, you’ll pay interest on the leverage you’ve used. So, for long-term positions, investing can be more cost effective – especially as overnight funding is just one of the costs of CFD trading. 

CFDs are often popular with active traders who might only keep positions open for hours or days. Investors, on the other hand, are mostly more passive.

CFD trading vs share trading example 

The easiest way to understand the difference between CFDs and share trading is with an example.

Let’s say ABC plc is trading with a sell/buy price of $1.30/$1.32, and you want to open a long position.

CFD vs share trading, which is best for me?

Now we know the benefits of both products, you should be able to choose which you want to get started with. To help you out, here’s a quick recap:

CFDs vs share trading strategies

CFD trading comes with a wide range of strategies and styles that you can choose from depending on your available capital, risk tolerance and the time you have to spend trading. Crucially, all CFD trading strategies can be used in rising and falling markets.

Examples include:

• Trend trading: which involves identifying the direction of market movement and holding a trade until the tide turns
• Range trading: which involves finding entry and exit points within consolidating markets – that is, a market trading between lines of support and resistance
• Breakout trading: is the practice of entering a trend as early as possible, ready to take advantage of the bulk of the move

Most CFD strategies are suited to day traders, who want to have all their positions closed out before the end of the day. Some CFD traders will hold their positions open longer, to take advantage of larger movements, but a lot of strategies are even shorter in duration – lasting seconds, minutes or hours.

This contrasts with investment strategies, which have traditionally only been buy-and-hold strategies in rising markets, that are held over months, years and decades.

However, arguably, some investment strategies now include using CFDs as a means of hedging against fluctuations in prices. So, finding a balance between long-term and short-term positions can be a strategy in itself.