CFDs vs Share Trading

Trading CFDs has a number of benefits over traditional share dealing

CFDs (Contracts for Difference) can help you make gains similar to those you can achieve through share ownership – but they’re not same as owning shares.

 

 

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
Stamp duty No Yes
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.

  

Opening Trade

   Share trade CFD trade
Share price 100p 100p
Size of trade/stake 10,000 shares 10,000 CFDs
Value of trade/stake £10,000 £10,000
Stamp duty £50 £0
Cost/margin £10,050 £1,000

     
   

Closing Trade

   Share trade CFD trade
Share price 110p 110p
Size of trade/stake 10,000 shares 10,000 CFDs
Value of trade/stake £11,000 £11,000
Profit £950 £1,000
Gain% 9.5% 100%

     
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.

 

Tax advantages

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.

 

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 between 2% and 10%) 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.

 

Go long or short

CFDs are a derivative product. They allow you to speculate on price movements of equities and other financial instruments without owning the underlying asset. This makes it possible to speculate on a share falling in value as well as rising – something which is difficult to do with conventional share dealing. Find out if CFD trading is for you.

 

Dividends

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 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.

 
 

 

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