CFDs vs share dealing

As you can see, the end 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.

Benefits of CFD trading

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

Leverage

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

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 $7500 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’.

What can I trade?

With share dealing, 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: forex, 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 5,000 global CFD markets. Using a single platform and account, you can take your position on EUR/USD, Amazon, the FTSE 100, gold and much more.

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

How to start CFD trading

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

• Open a live account to trade CFDs with real funds a demo account to develop your skills with virtual capital
• Add funds using debit card, credit card or bank transfer
• Choose a market from the 1000s available
• Buy (go long) if you think your market’s price will rise or sell (go short) if you believe it will fall
• Execute your trade, remembering to use stops and limits to control your risk

Benefits of investing

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.

Dividends

Some companies choose to pay a share of their profits back to shareholders in the form of a dividend. With CFDs, you won’t receive this payment. Instead, we’ll update your position to reflect the dividend.

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

No overnight financing

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.

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 vs investing example

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

Let’s say ABC plc is trading with a sell/buy price of 130p/132p, and you want to open a long position.

CFD trading vs share dealing, 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:

* Spread Betting and CFD Trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.

Feature	CFD trading	Shares dealing
Free from Stamp Duty*
Commission charged
Ability to go long – buy and take advantage of rising prices
Ability to go short – sell and take advantage of falling prices
Ability to hedge – go short and mitigate against potential losses in your shares portfolio
Leveraged trading – gain a large exposure for a fraction of the value
Immediate dealing – instant trading both in and out of a market
Access to other asset classes – such as indices, FX, etc
Access to global shares – trade over 5000 different markets from around the world
Receive dividend and interest adjustments
Physical ownership – benefits include the ability to attend AGMs
Pay overnight financing charge