Have you ever wondered what the difference between CFDs and share trading is? In short, with contracts for difference (CFDs) you speculate on price movements without owning the underlying asset. In contrast, with share trading, you’re buying the company’s stock outright and taking legal ownership. While that ownership versus exposure-only distinction is a key difference, there are several other important contrasts between the two, including leverage, costs, and trading hours. Let’s take a look.
CFD trading explained
CFDs are derivatives that track an underlying market – think shares, indices, forex pairs, commodities, etc. You can go long if you think the price will go up or short if you think it will drop. You also trade on margin, so a relatively small deposit controls a larger exposure. This can amplify potential gains and losses (funding/overnight holding, spreads and slippage also apply).
Benefits include being able to trade a wide range of markets from one account, the ability to trade rising and falling markets, as well as extended trading hours on many popular indices and commodities. Risks mostly centre on leverage and fast-moving markets, so sizing, stops and discipline are a must. Learn more about the advantages and risks of CFD trading.
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Share trading explained
Share trading is the purchase and sale of company shares through a stockbroking account. You pay the full trade value and get shareholder rights like voting and potentially dividends if you hold at the record date.
Many investors use shares for long-term wealth building, passive income (dividends) and to diversify their portfolios. There are risks, of course, such as market volatility, company-specific events (earnings surprises, capital raisings) and sector cycles. Short-selling isn’t typically available in a standard cash equities account, so traders will mostly use derivatives (e.g. CFDs) to express bearish views.
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CFDs vs share trading: A comparison
CFDs | Shares | |
|---|---|---|
Do I own the physical shares? | No. You trade price movements only. | Yes. You hold the equity and associated rights. |
Trade on leverage? | Yes. Margin lets a smaller deposit control a larger exposure. | Not usually in a cash account (separate margin loans are available through third parties). |
Short-term trading opportunities | Designed for tactical long/short trading and hedging. | Possible, but shares are commonly used for longer-term investing. |
Which markets are available? | Indices, forex, commodities, shares and treasuries – all from one account. | Shares and ETFs on the exchanges you set up in your stockbroking account. |
Deposit required to open a position | Margin deposit. The amount depends on the instrument. | Full value of the trade (plus brokerage). |
Can you go short? | Yes. | Not in a cash equities account (use CFDs/derivatives for short exposure). |
Trading hours | Often extended trading hours or near-24-hour access, depending on the market. | Exchange hours (some markets will have limited after-hours trading.) |
Shareholder privileges and dividends | No voting rights. Share CFDs are usually adjusted for dividends. | Yes. You have voting rights and may potentially receive dividends. |
Account features | Demo account: Yes. Mobile app: Yes. Costs: Spread, potential commission (instrument-dependent), funding/overnight holding. | Demo account: Generally not available. Mobile app: Yes. Costs: Brokerage per trade. |
Learn more about share trading
Trading styles: CFDs vs shares
CFDs are generally used by more experienced or active traders who seek exposure to short-term market movements or to hedge existing portfolios. These traders usually have a higher risk tolerance, understand how leverage and margin requirements work, and monitor positions closely due to fast-moving prices. CFDs can provide flexibility, the ability to trade in both rising and falling markets, and access to multiple global markets from a single account.
Share traders and investors, on the other hand, often have a longer-term focus and may aim to build wealth steadily over time. They tend to prefer direct ownership, potential dividend income, and the relative stability of unleveraged investing. Share investors generally have a lower risk tolerance and value the transparency and simplicity of holding listed company stocks directly.
Bottom line
The key differences between CFD and share trading lie in the type of market exposure and flexibility each offers. Share trading involves direct ownership of company shares, giving investors potential dividends and voting rights. CFD trading, on the other hand, provides leveraged exposure to price movements and the ability to trade in both rising and falling markets. Some market participants use both, depending on their objectives, preferred markets, and risk tolerance.
The risks and advantages of CFDs may suit experienced traders who want tactical opportunities across many different markets, while shares are often used by investors seeking long-term wealth building and income through dividends. Derivatives aren’t suitable for everyone – leverage can work against you as well as for you.
Want to see how CFD trading works in practice with CMC Markets? You can explore it using a demo account to practise with virtual funds. If you’re interested in traditional share trading, you can learn more about CMC Invest.
