A Brief Comparison Between Share CFDs and Share Trading
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Stocks and Shares?
A stock is generally recognised as an issuing company in the stock market (think of Microsoft or Apple, for example). A company issues shares or units of the value of a company (listed on a public stock exchange) or, from an investor’s perspective, units of ownership. The price of one share—the share price—is the cost to purchase one share of stock.
Share CFDs and Share Dealing
Share CFD Trading, or Contract for Difference (CFD) trading, is a derivative product focussing on underlying share prices: an arrangement between two parties in the Over-the-Counter (OTC) market. Importantly, through trading CFDs, the investor does not own the underlying asset—the shares of stock—but instead, CFDs pay the difference in price movements between entry and exit points between the two parties in the agreement. Trading CFDs offer a more accommodating method of trading shares than traditional Share Dealing (or Share Trading); for example, CFDs allow for an easier, more flexible way to short (sell) stocks (short-selling) and boast a higher leverage capacity.
On the other hand, Share Dealing involves the purchase of a direct stake in a company which usually comes with benefits, such as voting rights. When you buy shares in a company, you buy an actual piece of the company (and are considered a shareholder). Like trading Share CFDs, Share Dealing provides the potential for long-term growth, dividend payments, and capital gains. Like all financial investments, the downside with both types of Share Trading is that your position can depreciate, meaning potential losses.
When deciding between Share CFD Trading and Share Dealing, it comes down to an individual investor’s risk appetite, investment objectives and financial circumstances. For those seeking short-term opportunities (day traders, for example) and the use of higher leverage, Share CFD Trading may be a better option. Yet, Share Dealing could be the right choice if you are seeking long-term growth, to be a part-owner in companies, have voting rights, and the ability to benefit from dividends and the potential for capital gains (though, as stated above, some of these benefits can be found in CFDs).
Several factors must be considered to compare the costs of Share CFD Trading and Share Dealing (note that not all fees and costs are stated here and will differ depending on the brokerage).
Share CFD Trading and Share Dealing will bring costs such as broker’s commissions, margin costs, and other associated fees that may differ depending on the account type selected. At FP Markets, various account types are available to suit both long-term position investors and short-term day traders; check out this link to find out more.
For Share Dealing, unlike with many CFD brokers, investors may have to pay for the use of a trading platform: this could be a monthly, quarterly or weekly cost. However, like CFD trading, traders or investors dealing in physical shares will have to pay each time a position is opened and closed, which is essentially the cost of a full transaction (some Share Dealing brokerages refer to this as Round-Turn Charges). Another cost for those trading in the UK is Stamp Duty for physical Share Dealing (not applicable to Share CFD Trading as investors do not take ownership of the shares). In addition to the aforesaid costs, fees may be associated with any dividend payments received, specifically when Share Dealing.
When deciding between Share CFDs and Share Dealing, it is important to know all transaction costs in order to make the right decision.
Share CFDs offer a range of leverage options, meaning traders or investors can gain more exposure to a stock’s price movements than their capital (account equity). Leverage can help retail investors increase their potential returns but may equally increase potential losses.
In comparison, Share Dealing also offers access to margin accounts (margin trading), allowing for investors to incorporate leverage. Yet, the leverage offered will be much less than through trading Share CFDs. However, some investors elect to use a Cash Account (trade without leverage).
Ultimately, deciding between Share CFDs and Share Dealing, investors should consider their risk appetite and investment objectives, which may help determine whether or not to use leverage with either option.
A CFD broker, such as FP Markets, offers web-based, desktop, and mobile trading platforms for Share CFD Trading. Consider visiting FP Markets and exploring the suite of platforms offered.
Recognised platforms, like MetaTrader or cTrader, deliver an easy-to-use interface and an option to employ complex trading tools and features, allowing traders and investors to navigate the markets and use more advanced trading strategies. As noted in this article, most trading platforms offered by CFD brokers are free to access and use.
As also mentioned, access to a trading platform may incur an additional fee when trading physical shares (Share Dealing). But, like Share CFD Trading platforms, Share Dealing brokerages will offer several platform options, from web-based options to desktop solutions and/or mobile trading platforms (Android or iOS). Similarly, CFD and Share Dealing platforms will open the door to various markets (financial products), live real-time prices, easy order placement, access to a demo account and other tools and features.
When choosing between Share CFDs or Share Dealing, investors should consider the available trading platforms, their features, and how comfortable they are using them.
The subject of taxation is complex.
Awareness of tax implications when deciding between Share CFDs and Share Dealing is vital, as the right choice will depend on individual circumstances.
Ultimately, it is the trader’s responsibility to understand the tax liabilities before they start trading, which can be found through the relevant tax authorities of your country.