CFDs vs Stocks: Which is Better for Trading?

In this comprehensive guide, we delve into the intricacies of both stocks and contracts for difference (CFDs), two popular financial instruments, often used for day trading. Our aim is to equip you with a clear understanding of how these instruments work, from the underlying basics to their more advanced aspects. We will explore the distinct advantages and potential pitfalls of both CFDs and stocks and take a comparative look at their respective roles in trading strategies, taking into account factors such as leverage and market volatility.

The discussion also extends to the potential long-term implications of investing in CFDs, a topic often overlooked by many traders. We cast light on the workings of leverage in CFD trading versus stock trading, a fundamental concept that significantly influences your trading outcomes. Our guide will also address the impact of market volatility, a constant in the financial world, on both CFDs and stocks. Additionally, we will highlight the tax implications of dealing with CFDs and stocks, an essential aspect that every trader should be aware of.

Lastly, to ensure you're equipped with all the necessary tools for successful trading, we will guide you on choosing the right broker for both CFD and stock trading. Join us in this enlightening journey as we demystify the world of stocks and CFDs.

Contents: CFDs vs Stocks


Should I trade CFDs or stocks?

Whether an equity trader opts to trade CFDs, trade stocks or do both depends on what they are trying to achieve and their own personal circumstances. In this article we will explain the difference and hopefully help you decide which one might be better for your trading.

What is the difference between a CFD and a stock?

The major differences between a stock and a CFD is leverage and ownership. When you buy a stock you take ownership of the shares. Stock investing is in effect taking a small ownership stake in a company you believe in. When you buy a stock, you pay the full price for each share.

CFD stands for contract for difference. By CFD trading online, you can speculate on the price of a security without owning the underlying asset. The security underlying the CFD can be a stock, stock index, currency, commodity, or cryptocurrency. CFDs trade on leverage, meaning you can enter a trade with a smaller initial outlay of capital.

Understanding CFDs: How they work

Contracts for Difference (CFDs) are a type of derivative trading where the trader and the broker agree to exchange the difference in the value of a financial instrument between the opening and closing of the trade. This allows traders to speculate on price movements without owning the underlying asset. Key concepts to understand in CFDs include the concept of margin, leverage, and the spread. 

Understanding Stocks: How they work

Stocks represent ownership in a company and constitute a claim on part of the company’s assets and earnings. As an owner, you have certain rights, such as the ability to vote at shareholders’ meetings and to receive any dividends that the company allocates to its shareholders. The way to make money from owning stocks is by "buying low and selling high".

CFDs vs stocks: Comparison



Stock trading







Go Long and Short


Yes (but going short more complicated)

Range of markets to trade

Multiple markets

Equities and ETFs

Costs of trading

Spread & Rollover (Holding Costs)


Trading hours

24-hours, 5 days a week

During Stock Exchange opening hours


Yes via a cash adjustment



Losses can exceed deposits

Losses capped at amount invested

Voting rights




Trading: CFD example vs stock example

Example trade: Buy Apple stock with a bid: ask of $154.29/154.33

Buy 10 shares @ $154.33 and pay $1,543.30

Or Buy 10 CFDs @ 154.33 and deposit a 10% margin of $154.33

*NOTE: 1 stock CFD will normally represent 1 share of the stock. With index CFDs, the CFD may represent 10x the underlying asset. This information can always be found on the FlowBank trading platform under ‘info’ tab of the stock or index you are planning to trade. The order ticket will also show the margin requirement before you enter the trade.

Advantages and disadvantages of CFDs vs stocks

Both CFDs and stocks have their own advantages and disadvantages. Some of the key points are:

  • CFDs: CFDs offer high leverage, meaning traders can open larger positions with a smaller initial deposit. They also allow for profit from both rising and falling markets since you're speculating on price movement, not owning the underlying asset. However, they come with a high risk due to this leverage, and the charges and fees can stack up quickly. 
  • Stocks: Owning stocks gives you a stake in the company, potentially allowing for voting rights and dividends. They're typically a less risky investment than CFDs. However, they require a larger initial outlay, and potential returns are often lower and slower than CFDs.

Is CFD trading riskier than stock trading?

Leverage adds extra risk because price moves in the market you are trading will represent a larger percentage of the margin you have deposited than if you paid the full amount.

For example, if you have deposited 10% collateral for an equity trade, the share price only needs to fall 10% for you to lose your entire deposit. However, more funds can always be added to cover margin calls, offering some flexibility if used carefully. In some circumstances the losses on a trade can exceed the funds that were deposited for margin, creating extra potential risk.

Is CFD trading cheaper than stock trading?

What are the costs from trading CFDs? When trading CFDs, the cost includes the spread and an overnight funding charge, and sometimes a commission. Stock trading includes the spread paid to the stock exchange, custody fees and sometimes a commission but never an overnight funding charge.

Commission-free trading has made the cost of trading stocks more comparable with the cost of trading stock CFDs in recent years. The main consideration on cost is the intended holding period for the trade.

Find out FlowBank pricing here

CFDs for short-term trading

The ease at which you can go long and short CFDs as well as the leverage and overnight holding costs mean CFDs tend to be preferred for day trading and short-term trading strategies. Because of the one-time cost of commission, stock trading is preferred for long-term investing.

How to use CFDs for long-term investment strategies

Contract for Difference (CFD) trading can be an effective strategy for long-term investments. Here's how:

  • Diversification: CFDs allow you to diversify your portfolio across different asset classes, including stocks, commodities, indices, and more. This can provide broader market exposure and reduce risk 
  • Leverage: With CFDs, you can take advantage of leveraged trading, which means you can open a position with just a fraction of the capital required for traditional investing. However, leverage can also amplify losses, so it should be used responsibly.
  • Short Selling: CFDs allow you to make profits from falling markets as well as rising ones because you can sell short. This can be useful in hedging strategies during market downturns.

CFDs to hedge stock position

A popular circumstance in which a trader will do both stock trading and CFD trading is for hedging. This is typically where an investor wants to keep a long position in his stock portfolio open but wants to protect against short-term risk by going short the stock CFD. The lower margin requirement on the CFD means it is a more efficient hedge than going short the stock.

How does leverage work in CFD trading vs stock trading?

Leverage is a key difference between CFD trading and stock trading. In CFD trading, leverage allows traders to open larger positions with a smaller initial deposit. This means potentially larger profits, but also larger losses if the market moves against you. In contrast, stock trading typically does not involve leverage. When you buy a stock, you pay the full price upfront. Therefore, while your potential losses are limited to the amount you paid for the stock, your potential profits are also lower.

In the world of trading, leverage is a double-edged sword. It allows traders to magnify their exposure to market changes by borrowing funds from their broker. In CFD trading, leverage can be much higher than in traditional stock trading. For example, a leverage ratio of 50:1 in CFD trading means for every $1 in your account, you can trade $50 worth of an asset.

Impact of market volatility on CFDs and stocks

Market volatility can have a significant impact on both CFD and stock trading. With CFDs, the profit or loss is determined by the difference in price from when the contract was opened to when it was closed. Therefore, in a volatile market, this difference can be substantial. For stocks, market volatility can lead to fluctuations in share prices, which can affect the dividends investors receive and the overall value of their investment.

CFDs and stocks: Tax implications

When it comes to tax, both CFDs and stocks have different implications. For CFDs, profits are generally subject to capital gains tax, but losses can be offset against future profits for tax purposes. In contrast, stock profits are typically subject to capital gains tax, and while dividends are subject to income tax, they can be offset against the tax-free dividend allowance.

Choosing the right broker for CFD and stock trading

Selecting the right broker for CFD and stock trading is crucial for successful investing. Points to consider include:

  • Regulation and security: Make sure the broker is regulated by a reputable authority and offers robust security measures.
  • Trading platform: The broker’s trading platform should be user-friendly, reliable, and equipped with all the necessary tools and features.
  • Costs and charges: Consider the trading and non-trading fees and ensure there are no hidden charges.


CFD trading platform

Some online brokers specialise in the stock market, while others specialise in CFDs and forex. FlowBank offers a multi-asset trading platform with 50,000+ financial products including stocks and CFDs, alongside the security of a Swiss Bank account.

Latest News