CFD Trading vs Stock Trading: Key Differences

As financial markets evolve, traders face an important decision: should you trade Contracts for Difference (CFDs) or invest directly in stocks? With Plus500 offering both CFD trading and the Invest platform, understanding these differences is crucial for your trading.

This comprehensive guide explores the key differences between CFDs and stock trading, enabling you to make informed decisions based on your financial objectives and risk tolerance.

TL;DR

• CFD trading uses leverage and margin, allowing exposure to 2,500+ assets without ownership

• Stock trading involves buying actual shares with full capital, owning 1,200+ stocks and ETFs

• Key differences: leverage, asset variety, short selling, ownership, overnight fees, and trading objectives

• CFDs suit short-term speculation; stocks are better for long-term portfolio building

What is CFD Trading vs Stock Trading?

CFD Trading Explained

CFD trading allows you to speculate on price movements without owning the underlying asset. According to the Investment Association (2024), CFD trading has grown 23% year-on-year amongst UK retail traders.

Stock Trading Fundamentals

Stock trading involves purchasing actual shares, granting ownership rights, and potentially receiving dividend payments. The London Stock Exchange reports that direct stock ownership remains the preferred method for long-term wealth building (LSE Annual Report, 2024).

5 Key Differences Between CFD and Stock Trading

1. Leverage and Margin Requirements

CFD Trading:

• Uses leverage to amplify market exposure

• Requires only a percentage of the position value as margin

• Higher potential returns or losses due to leverage 

Stock Trading:

• Requires full capital for purchase

• No leverage applied to available cash

• Lower risk but requires more capital

• Direct correlation between investment and potential returns

2. Asset Variety and Market Access

CFD Platform Offerings:

• 2,500+ instruments across multiple asset classes

• Forex pairs (EUR/USD, GBP/USD)

• Commodities (Gold, Oil, Agricultural products)

• Indices (FTSE 100, S&P 500)

• Cryptocurrencies (Bitcoin, Ethereum)

• ETFs and Options

Invest Platform Offerings:

• 1,200+ individual stocks from global exchanges

• 90+ ETFs for diversified exposure

• Access to new IPOs when companies go public

• Focus on blue-chip and growth stocks

3. Short Selling Capabilities

CFD Trading:

• Sell positions without prior ownership

• Take advantage of falling markets

• Essential for hedging strategies

• No borrowing costs for short positions

Stock Trading:

• Traditional buy-first approach

• Limited short-selling options

• Requires stock borrowing arrangements

• Higher costs for short positions

4. Asset Ownership and Rights

CFD Trading:

• No physical asset ownership

• No voting rights or shareholder benefits

• No dividend payments (dividend adjustments may apply)

• Pure price speculation focus

Stock Trading:

• Full legal ownership of shares

• Voting rights in company decisions

• Dividend payments where applicable

• Long-term capital appreciation potential

5. Costs and Fees Structure

CFD Trading Costs:

• Overnight financing fees for positions held after market close

• Spread-based pricing

• No commission on most instruments

• Other fees may apply

Stock Trading Costs:

• No overnight fees for long positions

• Potential custody fees

• Lower ongoing costs for buy-and-hold strategies

Which Trading Method Suits Your Strategy?

Choose CFD Trading If:

• You prefer short-term trading opportunities

• Want exposure to multiple asset classes

• Seek to take advantage of both rising and falling markets

• Have an x amount of capital but want larger market exposure

• Interested in earnings season speculation

Choose Stock Trading If:

• Building long-term investment portfolios

• Seeking dividend income

• Want actual ownership of company shares

• Prefer lower-risk investment approaches

• Planning for retirement or long-term financial goals

Risk Management Considerations

Both trading methods carry inherent risks. The Financial Conduct Authority emphasises that 76% of retail investor accounts lose money when trading CFDs (FCA, 2024). Key risk factors include:

• Market volatility affecting both CFDs and stocks

• Leverage risk specifically impacting CFD positions

• Liquidity risk during market stress periods

• Currency risk for international exposures

Getting Started: Platform Comparison

Plus500 CFD Platform Features

• Real-time market data across 2,500+ instruments

• Advanced charting and technical analysis tools

• Risk management features ,including stop-loss orders

• Mobile and web-based trading platforms

Plus500 Invest Platform Features

• Dividend tracking and reinvestment options

• Risk management tools

• Research and analysis resources

Conclusion

The choice between CFD and stock trading ultimately depends on your financial objectives, risk tolerance, and trading timeframe. CFD trading offers flexibility, leverage, and diverse market access, making it suitable for active traders seeking short-term opportunities and speculation. Stock trading provides ownership benefits, dividend potential, and lower risk profiles, ideal for long-term investors building wealth.

Understanding these differences enables informed decision-making about which Plus500 platform aligns with your trading strategy. Consider starting with a demo account to experience both platforms before committing capital.

*Product availability is subject to operator.