How It Works 
Leaderboard 
Tools 
Support 
Become a Partner 
When you’re looking to trade, you might come across two common options: CFDs (Contracts for Difference) and shares (or stocks). Both have their benefits and risks, and it’s important to understand how they work before deciding which one suits your trading style.
In this guide, we’ll break down what CFDs and shares are, how they differ, and what you need to know about each one to make an informed decision.
What Are Shares?
Shares are units of ownership in a company. When you buy shares, you own a small part of that company. If the company performs well, the value of your shares can go up, and you might even receive dividends (a portion of the company’s profits).
Shares are relatively straightforward: you buy them, hold them, and hope their value increases. They don’t involve leverage, which means you can’t borrow money to make your trade bigger. This makes trading shares less risky in terms of potential losses. The most you can lose is the amount you invest. If your £1,000 investment drops to £0, that’s your total loss.
What Are CFDs?
CFDs, or Contracts for Difference, are a bit different. Instead of owning an actual asset (like a company or a product), you’re essentially betting on whether the price of an asset will go up or down. When you trade CFDs, you’re speculating on price movements, not owning the asset itself.
What makes CFDs unique is that they are leveraged products. This means you don’t need to invest the full value of the asset you’re trading. Instead, you only need to deposit a small percentage (called a margin) of the total value. For example, if the margin is 20%, you can open a £1,000 position with just £200.
While this gives you the opportunity for bigger profits, it also increases the risk. If the market moves against your trade, you can lose more than your initial deposit. In some cases, your loss could even exceed your initial margin.
Examples of CFDs:
Key Differences
Let’s take a closer look at how these two trading options compare.
1. Leverage and Costs
| CFDs | Shares |
| You can control a large position with a small deposit, thanks to leverage. This means a smaller upfront cost but the potential for bigger gains (or losses). | You need to pay the full price of the stock upfront. This can be a larger initial cost, but your risk is limited to the amount you’ve invested. |
2. Risk
| CFDs | Shares |
| Leverage amplifies both profits and losses. If the market moves in the wrong direction, you could lose more than your initial investment. | The risk is limited to the amount you invested. If the share price drops, you can only lose as much as you spent on the stock. |
3. Flexibility
| CFDs | Shares |
| You can profit whether the market is going up or down, by either going long (buying) or short (selling). This makes CFDs popular for short-term traders and day traders. | Generally, you can only profit when the stock price goes up. If you’re looking to short sell (betting on a price drop), stocks may not offer the same flexibility. |
4. Trading Hours
| CFDs | Shares |
| Can be traded nearly 24/7, even outside of regular market hours. | Typically, you can only trade stocks during the hours of the stock exchange where they are listed. |
5. Dividends and Voting Rights
| CFDs | Shares |
| Because you’re not technically owning the asset, you won’t receive dividends or have voting rights in the company. | As a shareholder, you might receive dividends and, in some cases, get to vote on company matters. |
6. Complexity
| CFDs | Shares |
| These can be more complex due to the leverage involved, and they require active management of your trades. It’s important to have a solid risk management strategy. | More straightforward. You buy the stock, hold it, and wait for its value to go up (or down). |
Which Is Right for You?
Choosing between CFDs and shares depends on your trading style, goals, and risk tolerance.
- Shares are great for long-term investors who want to own a piece of a company and don’t mind waiting for the value to increase over time.
- CFDs are more suited for traders looking for flexibility and short-term opportunities, and who are comfortable with taking on higher risk for the potential of higher rewards.
Remember, CFDs offer more ways to trade and can be useful for hedging or speculating on market movements. However, they come with higher risks. Shares are a more stable and simpler option but don’t offer the same flexibility as CFDs.
Whether you choose CFDs or shares, both have their place in a trader’s portfolio. You can even trade both types of instruments to diversify and manage your risk more effectively. Sign up a Prop Trading account with us today!
