A CFD is a Contract For Difference, a contract between a buyer and seller to pay the difference in price between the underlying asset they are trading.
So, with CFDs, say you buy 1 share for the price value at that time (known as going ‘long’) as you’re expecting it to go up in price. If it does go up in value, the seller pays you the difference in price and you make that profit. However, if you predict incorrectly and the share goes down in value you pay the seller.
Importantly, CFD traders do not trade or own the underlying asset. CFD trades simply involve betting on the future price of a particular asset.
Also, you don’t get any voting rights with CFDs, because you don’t own the underlying share, but you may get dividends, dependent on your trade.
However, with shares (real stock) you are buying a little chunk of the business. So, you legally own that little chunk,asyou’re physically buying those shares.
The main difference is with a CFD you are speculating on a markets price without taking ownership on the underlining asset. Whereas with a share dealing you are getting ownership of the underlying stock.
CFD’s VS Shares – Pro’s and Con’s
Like every investment, there is a level of risk and before investing any money, thorough research and training should be gained.
Here are the top-line comparisons on CFDs versus Shares.
|
CFDs |
Shares |
| No Stamp Duty to pay – not applicable | Stamp Duty – usually pay 0.5%* |
| Single currency account – keeps everything neat and tidy in one place | Several different currency accounts are often required |
| Allows you a leveraged position – only need a percentage of the share (like putting down a deposit) | No Margin – shares are bought pound for pound |
| Short (sell) and Long (buy) – you can speculate and gain on the markets going up as well as down. | Long only – you can only buy shares, meaning you cannot go short and bet on the shares going down. |
