CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63.1% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs vs Share Trading
Trade financial markets without the costs associated with traditional investing
When you trade CFDs (Contracts for Difference) you’re not buying physical assets, such as company shares, gold bullion or units in index-tracking funds. Instead you’re agreeing to exchange the difference in the price of an asset over a set time.
CFD trading is suitable for speculating on short-term changes in the value of an asset. For example, you can open and close a position in a matter of minutes, so you can make gains from even short term market fluctuations. Because you’re trading on margin, your capital outlay can be significantly less than compared with traditional forms of investing but your potential losses can be greater than your initial deposit.
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 | No1 | Yes1 |
| Overnight financing | LIBOR +2% only when you go long, none when you go short | No |
A CFD trade vs a share trade in practice
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 duty1 | £50 | £0 |
| Cost/margin | £10,050 | £2,000 |
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.
Tax advantages
Under current UK tax laws CFD trading is free of Stamp Duty1. Profits on both CFD and share trading can be subject to Capital Gains Tax1. However, it is worth remembering that trading losses can also be offset against profits. Read about all the other advantages of CFD trading.
Go long or short
Under current UK tax laws CFD trading is free of Stamp Duty1. Profits on both CFD and share trading can be subject to Capital Gains Tax1. 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
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.
