CFDs vs share dealing

Learn more about the differences between contracts for difference (CFDs) and shares, and discover the benefits and risks of trading each instrument with our handy guide to CFD trading vs share dealing. The page offers a comparison of the two instruments.

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What’s the difference between CFD trading and share dealing?

One major difference between trading contracts for difference (‘CFD’) and share dealing is that when you trade a CFD, which is a leveraged product, you are speculating on the underlying market’s price without taking ownership of the underlying asset, whereas when you trade shares you need to take ownership of the underlying stocks.

Another difference is that you trade with leverage when trading CFDs, meaning you’ll only need to put up a fraction of the full value to open and maintain a position – the ‘margin’ – to gain full exposure. While leverage enables you to spread your capital further, your profit or loss will still be calculated on the full size of your position. That means both profits and losses can be hugely magnified compared to your outlay, and that losses can exceed deposits. For this reason, it is important to pay attention to the leverage ratio and make sure that you are trading within your means. When you trade shares, on the other hand, you’ll need to pay the full cost of your position upfront so cannot lose more than you invest.

Comparative features of CFD trading and share dealing

Both contracts for difference and share dealing offer ways to take advantage of price movements in financial markets – and both may form part of any investor’s portfolio. Take a look at the key points below to find out about the different benefits and risks of CFD trading and share dealing and decide if CFD trading is for you.

CFDs Share dealing
Trade CFDs on a wide variety of financial instruments, including shares, indices, forex and commodities Trade only shares and ETFs
Trade using leverage to spread your capital further, which can amplify your profits and losses Pay the full value of your shares up front
Losses can exceed initial deposits on a given position Limit risk to your initial outlay
Go long or short on a market’s direction Deal only on rising prices

You can receive dividends. Your CFD positions may be credited or debited adjustments to take into account any changes from dividends.

For example, there are dividend adjustments on equity CFDs and stock index CFDs, which mean either a credit or debit to your position.

It is important to understand that there is no material impact on you by either crediting or debiting your account ledger with the exact amount you have incurred as an additional running loss / profit due to dividend adjustments

You will receive dividends (if paid)
Deal around the clock on a number of markets Deal only during stock exchange opening hours
No shareholder privileges Receive shareholder privileges, such as voting rights on major company issues
No expiry dates (excluding forwards and options) No expiry dates generally
CFDs can generally be traded round the clock. IG offers 24-hour CFD trading on forex and major stock indices. During the underlying market hours for other markets. IG also offers weekend trading on selected markets Only when the related stock exchange is open
You need to pay overnight funding charges on all markets, except futures. Rollovers on futures. Other fees and charges may also apply There are generally no fees to hold shares, but your broker may charge other administrative fees

CFD is commonly traded by those who are looking for opportunities

- Intra-day
- Daily
- Medium-term

Share dealing is commonly employed by traders who are looking to invest with a longer timeframe. Some traders also use share dealing for shorter term investments

FAQs

What are the fees and charges when trading CFDs?

The fees and charges for share dealing and CFD trading can differ significantly. When you trade share CFDs with IG, you trade at prices derived from the real underlying market price. This means that there’s no spread – instead, you’ll pay a commission, and the costs of any funding adjustments or overnight fees. Other fees and charges may also apply. When you buy shares, you’ll need to pay commission and may need to pay other administrative broker fees, along with any applicable charges and taxes charged by the country where the share is listed. For details of IG’s fees and charges for CFD trading, please refer to our charges page.

Can I use CFDs to hedge my other investments?

Some traders use CFDs to hedge their other investments, such as shares that they may currently hold. They may trade CFDs to go short on markets as a way to hedge short-term volatility by taking a position in the opposite direction of their share position.

If the market does fall in value, the loss to their share position could be offset by gains in their short CFD share trade. However, if the share price had increased instead, then they could close their CFD position and any losses could be offset by profits to their shareholding.

Is there a settlement period when closing a CFD position?

No, CFDs don’t have a settlement period. When you trade CFDs your profit or loss is calculated straight away when you close your position.

Are CFDs subject to the same settlement period as shares?

Settlement is the point at which cash is paid, or received, in exchange for shares. When trading shares it can take two or three business days after the transaction, before the money will enter or leave your share dealing account.

With CFDs, as you will not be taking ownership of the shares, payment can be settled straight away.

Develop your knowledge of CFD trading with IG

Find out more about CFD trading and test yourself with IG Academy’s range of online courses.

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