Stocks vs CFDs: The Key Differences

Investment in stocks has a long-standing reputation for the potential to earn big returns for those who can navigate the ups and downs of the trading markets.

An investment opportunity that is becoming increasingly popular, however, is the use of CFDs (Contract For Difference).

Where purchasing stocks in a business means that you own that stock, a CFD simply matches the value of a stock or commodity without the element of ownership.

Key Differences Between CFDs and Stocks

Both stocks and CFDs are viable trading options; however, there are key differences between the two investment opportunities:

What Do You Own?

This is the main difference between CFDs and stocks. When you purchase stocks, such as shares in a business, you own those stocks until you sell them.

With CFDs, there is no element of ownership. What you have instead is a contract with a broker.

The advantage of ownership, in this context, is the related range of shareholder perks and benefits. For example, voting rights or the option to attend shareholder meetings.

Another benefit of stock ownership is the payment of dividends.

If you purchase CFDs concerning company shares, the likelihood is that you will be paid a dividend if you have a CFD in place at the time when dividends are released to shareholders.

However, the conditions surrounding that dividend, such as the amount paid out, will vary from the dividend arrangement for a stockholder.

Financing the Investment

Once an investor in stock has spent their investment pot, they cannot make new purchases without the sale of their existing stocks.

However, a CFD investor has the opportunity to pay a percentage of the stock price and borrow the remaining amount from their broker.

This is known as leverage trading.

For example,

James and Michael each have £10,000 to invest. James uses his £10,000 to buy 19 Tesla shares priced at £502 each, leaving him with £462 unspent.

Michael is also interested in Tesla, but instead of using most of his money in a straightforward stock purchase, he arranges a CFD with a 10% margin.

He invests £954 and borrows the rest of the money from his broker. Michael then has £9,046 remaining to invest elsewhere.

What Can You Invest In?

If you invest in stocks, you are generally limited to purchasing business shares or exchange-traded funds (ETFs). An ETF is a collection of securities that are traded on an exchange.

By contrast, CFDs can be used for a whole host of trading instruments such as business shares, foreign exchange (forex), indices, cryptocurrency, commodities and bonds.

Speed of Cash Settlement

Should you sell all or a portion of your stocks, you can expect to wait at least a couple of days before you receive the cash settlement.

However, when you sell your CFD, or it comes to an end, you will be paid immediately. The benefit to an immediate cash settlement is the speed with which you can reinvest your money or take it as income.

Trading Hours

If you invest in stocks, your trading will be limited to stock exchange hours. This is generally from 8:00 a.m. to 4:00 p.m. Monday to Friday in the UK.

Stock exchanges are closed for trading on a weekend and for bank holidays.

If you invest in CFDs, however, which are open to a wider range of investment instruments (forex, commodities, etc.), you have access to many more markets.

Therefore, you can generally trade for twenty-four hours every day.

Length of Investment

Your decision to invest for a short length of time (be that hours or days) or on a longer basis (stretching from weeks to even years), will inform your choice of stocks or CFD investment.

CFDs can be used for short or long-term investments, but are especially suited to the short term because many of the investment instruments they trade-ins, such as cryptocurrency or forex, are subject to rapid rises and falls in price.

By comparison, stock trading is not suitable for short-term investments because it relies on a buy-and-hold strategy and restrictions linked to actual ownership of stocks which may prevent a quick sale.

Myanfx-edu does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.