CFDs vs Stocks: Which is Better for Trading?

Learn the differences between stocks and contracts for difference (CFDs) as well as the pros and cons for using each one for day trading.

Contents: CFDs vs Stocks

  • Should I trade CFDs or stocks?
  • What is the difference between a CFD and a stock?
  • CFDs vs stocks: Comparison
  • Trading: CFD example vs stock example
  • Advantages of CFDs vs stocks
  • Is CFD trading riskier than stock trading?
  • Is CFD trading cheaper than stock trading?
  • CFDs for short term trading
  • CFDs to hedge stock position

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.

CFDs vs stocks: Comparison

Properties

CFDs

Stock trading

Ownership

No

Yes

Leverage

Yes

No

Go Long and Short

Yes

Yes (but going short more complicated)

Range of markets to trade

Multiple markets

Equities and ETFs

Costs of trading

Spread & Rollover (Holding Costs)

Commission

Trading hours

24-hours, 5 days a week

During Stock Exchange opening hours

Dividends

Yes via a cash adjustment

Yes

Losses

Losses can exceed deposits

Losses capped at amount invested

Voting rights

No

Yes

 

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 of CFDs vs stocks

  • Leverage

Leverage offers the ability to enter larger positions with a smaller amount of capital. This exposes the trader to greater risk and potential reward.

  • Go long and short

To go long a stock CFD you click the buy button and to go short you click the sell button, the process is exactly the same.

  • Access lots of markets

There is CFD trading on most major asset classes including Stocks, foreign stocks, Forex, Commodities, Indices, etc

  • 24-hour trading

CFD trading is generally available 24 hours per day, making it more accessible to international traders. Most stock CFDs trade only during stock exchange hours.

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.

CFD vs stock Reddit

Some retail traders on popular Reddit forums like WallStreetBets have used CFDs to place trades in meme stocks as well as cryptocurrencies like Dogecoin. These traders benefitted when certain online stockbrokers blocked clients from buying more GameStop shares and AMC shares because CFD trading continued mostly unabated. However, when trading very volatile stocks (AMC gained 1500% in a month) it is not necessary to use leverage, in fact the leverage will likely unnecessarily exaggerate the already high risk involved in trading so-called Reddit stocks.

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.

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.

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