Here are the key similarities and differences between trading CFDs and owning shares.
|Key differences||CFDs||Share Dealing|
|Ownership||You don’t own the shares||You do own the shares|
|Dividends and voting||You get dividends but don’t have any voting rights||You get dividends and may have voting rights|
|Cost||Your initial outlay is only a proportion of the position value (which could be as low as 0.5%) to place a CFD trade||You need to pay up the full value of the shares|
|Market risk||You can go ‘long’ or ‘short’, so you can gain if the market rises or falls||You’ll only make a gain if the share price rises|
|How to buy||Online, using Spread Co’s trading platforms||Through a broker|
|Commission||None, all costs are included in the spread||May be broker commission to pay|
|Overnight financing||LIBOR +2% only when you go long, none when you go short||No|
*Tax treatment depends on your individual circumstances and tax laws can change or may differ in a jurisdiction other than the UK.
A CFD trade vs a share trade in practice
Here’s an example of a share trade and a CFD trade on the same asset.
|Share trade||CFD trade|
|Size of trade/stake||10,000 shares||10,000 CFDs|
|Value of trade/stake||£10,000||£10,000|
This is just an example. If the share price fell by a similar amount the loss on the CFD trade would be magnified in the same way that the profit has been in this example.
Under current UK tax laws CFD trading is free of Stamp Duty. Profits on both CFD and share trading can be subject to Capital Gains Tax. However, it is worth remembering that trading losses can also be offset against profits. Read about all the other advanatges of CFD trading.
Go long or short
Under current UK tax laws CFD trading is free of Stamp Duty. Profits on both CFD and share trading can be subject to Capital Gains Tax. However, it is worth remembering that trading losses can also be offset against profits. Read about all the other advantages of CFD trading.
Margin & leverage
As you can see from the table above, with CFDs you are able to trade on margin. This means you are only required to put up a small percentage of the value of your trade (usually from 3.33%) to get the same exposure as a share deal requiring 100% cover for the investment. As a result, CFDs employ leverage. This means that profits and losses are magnified. Find out about our risk management tools.
Dividends are treated slightly differently for CFDs than on share deals. For long positions, open CFD trades receive 90% of the net dividend value through a credit to your account. For open short UK equities positions, 100% of the net dividend value is debited from your account. Visit our CFDs explained page for more information.
*Tax treatment depends on your individual circumstances.
Tax laws can change or may differ in a jurisdiction other than the UK.