For traders seeking to take out positions in financial markets and gain exposure to company share prices, there are two main approaches – share dealing directly or trading CFD stocks.
Share dealing involves buying the underlying shares outright, while CFDs allow traders to speculate on price movements without owning the underlying asset.
These approaches are widely used by traders, but looking at CFD vs stock trading means understanding that they involve fundamentally different benefits and risks.
The right approach for each trader will depend on key goals, time horizon, and attitude to (and appetite for) risk in order to align the approach with key trading objectives.
What Are Contracts for Difference and How Do Stock CFDs Work?
Contracts for Difference (CFDs) involve trading with derivatives and speculating on asset or share price movements without directly purchasing the underlying assets or shares.
Traders enter into a contract with a broker to open trades. Traders can then go long (open a position) in anticipation of prices going up or go short (close a position) if prices are expected to drop.
Leverage is a common component of CFD trading, allowing even beginner traders or those with a small amount of capital to take up larger positions using smaller deposits. While it can greatly increase returns, it can also amplify potential losses, so it should always be used as part of a strict risk management approach.
CFD Stocks vs Share Dealing: Ownership, Leverage and Market Direction
The main difference between stock CFDs and directly dealing in shares is that the latter gives the investor full ownership of the asset and a stake in the company, while a CFD provides exposure to price movements without any ownership.
Leverage is not available on share trading, which means traders must put down the full value of the trade as a deposit. CFD traders have access to leverage at all levels in order to gain exposure to larger positions with fractional deposits.
CFD stocks are generally suited to shorter-term traders and/or hedging strategies for those wishing to capitalise on short-term price movements in either direction. This gives traders the ability, the freedom (and the risk) of trading in rising or falling markets.
Shares trading is more suited to longer-term traders who wish to hold positions for an extended period of time and benefit from long-term growth potential associated with companies performing well over time.
Costs and Risks of CFD Shares and Share Dealing
Both the costs and risks involved with CFD shares and share dealing also differ. Brokerage charges and commissions are usually due on share trading, typically calculated either as a flat fee or a percentage of the trade value.
Shareholders could be seen as getting value for their money as they gain both voting rights and potential for dividends. The latter is a key benefit when trading shares with successful companies, either as a passive income stream or reinvested as compound returns.
The risks involved with share trading are typically lower than CFDs because leverage is not involved, making the trades less prone to volatility and more exposed to a more stable environment.
Risk is typically tied to the companies that the shareholder has invested in with regard to events that could impact their profits. This includes wider market volatility and sector cycles as well as more company-specific events. For share dealing, the value of the shares can always fall, meaning capital remains exposed to market risk.
Certain shares may also be tricky to sell, and it can take longer than expected to close a position. As shares trading is more associated with longer-term trading strategies, it can also take time to accumulate returns and build growth.
When it comes to CFD stocks trading, the main costs involved are spreads, commissions (usually applicable), and overnight financing for CFD positions. The cost of holding positions overnight can quickly accumulate and eat into profits, while commissions are usually charged using a variable fee based on trade size with a minimum commission per order.
Leverage is both a key cost and a key risk of CFD stock trading. Leveraged losses can grow quickly if the market moves against the trader. Financial markets and the CFD markets in particular also typically move quickly and have a high rate of volatility, which can magnify losses further.
Traders may also see their positions subject to sharp, sudden price swings, with even the smallest market movement potentially having a major negative impact on the value of positions.
In cases where positions are already at a loss, traders may need to invest more funds (the “margin call”), increasing the risk of emotional trading, impulsive decisions and greater losses. All of this together makes stringent risk management an essential part of trading with CFD stocks.
CFD vs Stock Trading: Which Approach Fits Your Trading Goals?
As with all financial market trading, the right approach is crucial in order to optimise outcomes and enjoy a personalised trading journey that aligns with individual objectives, experience and risk tolerance.
Every trader will have different goals, different ability and willingness to accommodate risk, preferred holding periods, a personal trading style and a certain amount of time they are willing and able to dedicate to monitoring the markets.
With this in mind, CFD trading is usually suited to those traders motivated by and focused on shorter-term price movements, responding quickly to fast-moving markets and making frequent trades and quick decisions. It’s also suited to those who enjoy the ability to trade in either market direction and in rising or falling markets.
CFD trading also suits traders who are comfortable with using leverage and with a clear understanding of its potential to magnify both profits and losses. It is advisable for traders with less experience to utilise demo accounts in order to familiarise themselves with managing volatility in the CFD markets as well as gain a deeper understanding of the amount of time needed to monitor positions consistently.
Share dealing involves a much slower-paced, less volatile and “slow burn” approach to trading where the risk is usually lower but the reward can take far longer to materialise.
It may appeal to those who prefer direct ownership of the stock rather than speculating using derivatives trading and also suits those traders comfortable with holding positions for longer periods of time.
Share dealing can be very rewarding in the sense that traders can invest in companies that appeal to their interests and goals, acquiring ownership and participating in the company’s long-term growth. There is also the potential for an additional income stream via dividends.
Risk is more transparent with share dealing vs CFD stocks because leverage is not involved. Leverage is the key reason why CFD trading carries a higher level of risk, compounded by the speed at which the market can move. It often requires disciplined risk management strategies, including the use of stop-loss orders, position sizing and careful capital allocation.
Share dealing still involves investment risk, as share prices can rise or fall, but without the additional complexity and amplified exposure that leverage brings.
Share dealing is also more hands-off, with less time required to monitor positions and far less concern about short-term volatility, instead focusing on long-term trends and slow, steady growth with a diversified portfolio.
CFD Stocks and Share Dealing FAQs for Beginners
What are CFD Stocks?
CFD stocks are Contracts for Difference based on the price of publicly traded company shares, allowing traders to speculate on whether a stock's price will rise or fall without any requirement to own the underlying shares.
Instead of buying the stock itself, traders enter into a contract that reflects the difference between the opening and closing price of the position. CFDs are commonly used for short-term trading and offer the ability to trade with leverage and take both long and short positions, although they also involve a higher level of risk.
CFD vs Stock: Which is the Right Trading Style for Me?
The right choice depends on individual financial goals, risk tolerance, and preferred trading style. CFDs are generally better suited to active traders looking to profit from short-term price movements, trade in both market directions, and use leverage. Stock trading is typically more appropriate for investors seeking direct ownership of shares and long-term capital growth.
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