When it comes to trading securities, you have two major options—CFD trading and share trading. At first glance, they may seem similar—after all, both allow you to speculate on financial markets.
However, they operate differently when it comes to leverage, short selling, fees, ownership rights, and more. These distinctions greatly impact your potential profits, risks, and strategic capabilities as a trader.
Given the profound differences, many traders opt to use both CFD and share trading approaches to capitalize on varying opportunities. So, which one is right for you?
To decide, you need to weigh the unique pros and cons of each model. This will help you find the trading style that best fits your goals, risk appetite, account size, and capabilities. Ultimately, understanding these key differences allows you to trade smarter.
What Is CFD Trading?
CFD trading allows you to speculate on financial markets without owning the underlying asset. Instead, you trade a contract with your broker that mirrors the asset’s price.
For example, you’d trade a CFD contract on Apple stock rather than directly buying Apple shares. Your CFD contract value rises or falls following the share price. CFDs provide leverage since you only need to put down a small deposit (margin) to gain full market exposure. This gives you bigger potential profits, but losses can exceed your capital.
Unlike stocks, CFDs let you go short of profit when prices fall. While highly speculative, CFD’s unique features, like leverage and short selling, attract active traders seeking elevated risks and rewards.
Pros Of CFD Trading
CFD trading offers several advantages that attract active traders seeking risks and rewards:
- Leverage allows you to put down just a small margin deposit to gain much larger exposure. This amplifies potential profits with less upfront capital.
- You can trade long or short, capitalizing when prices rise or fall. Share trading only allows long positions.
- You avoid stamp duty on purchases and may benefit from lower brokerage fees versus share trading in some markets. This saves transaction costs.
- Trading CFDs provides exposure to global markets by accessing equities, indices, commodities, and currencies from one platform.
CFDs uniquely offer increased profit potential and strategic trading capabilities to excite active investors.
Cons Of CFD Trading
While the high leverage and speculative potential of CFDs appeal to active traders, several drawbacks need consideration:
- Leverage is a double-edged sword. Although it amplifies your profits, it also accelerates losses.
- Most brokers charge overnight financing fees to hold CFD positions. These recurring fees compound over time and undermine long-term profitability.
- CFD pricing often has slight variances from the underlying asset price. Less favorable pricing can hamper profit potential.
- Speculative derivatives like CFDs face more regulations and trading restrictions from authorities. These regulations may limit your trading.
The speculative nature of CFDs makes them inappropriate for casual investors. Unless you have an ironclad risk management approach, the rapid losses can overwhelm your account.
What Is Share Trading?
With share trading, you directly buy and sell shares in a company listed on a stock exchange. By purchasing shares, you own a portion of the company and participate in its profits or losses. You can profit as prices rise and sell to realize your gains.
Share trading typically only allows you to go long, speculating on rising prices. You cannot short-sell. Trades are executed on exchange via a stockbroker at current market prices. Settlement occurs in a couple of days.
By owning the asset itself, shareholders gain voting rights and other ownership privileges absent from derivatives like CFDs.
Pros Of Share Trading
Share trading has distinct benefits over speculative derivatives like CFDs:
- It’s less risky since you can only lose your trade investment, no matter how much prices move. No leverage means less volatility.
- Get dividend payouts from profitable companies you invest in as an added return stream.
- Gain legal ownership rights, including voting on company matters and access to IPOs.
- Trade at exact exchange prices in real-time—no opacity or price deviation risks from a broker.
Share trading aligns closest to investing rather than short-term speculation—the transparency and legal ownership open longer-term opportunities.
Cons Of Share Trading
While share trading has stability advantages, it lacks some of the profit drivers of CFDs:
- Requires full capital upfront to fund share purchases rather than just a margin deposit. This limits your market exposure.
- You can only make money when prices rise. No short selling mechanism means you can’t profit from falling prices.
- Share ownership has tax and reporting requirements that derivatives avoid in some jurisdictions.
- Pay stamp duty and typically higher brokerage fees per trade compared to CFDs. This diminishes net profits.
Share trading lacks the amplified leverage and bi-directional trading of CFDs. Your profit potential relies exclusively on rising markets.
Ultimately, CFD and share trading both offer viable yet very different ways to speculate on securities markets. Deciding what fits your trading objectives best starts by weighing their distinct pros against the cons.
Analyze your risk tolerance, desired market exposure, capital, and strategy to determine which model to focus on—or use both for diversification. Only by matching the model to your capabilities can you trade and invest in your strengths.