Shares

Share CFD or share

Buying a share makes you a part-owner of the company, with the dividend, the vote and the shareholding recorded in your name or your broker's nominee. Buying a share CFD gives you a contract with the broker that tracks the share price, with leverage, the ability to go short, a financing charge for every night held, and no ownership. A CFD holder is paid a cash adjustment equal to the dividend on a long position and charged it on a short, but has no vote and no claim on the company.

The leverage on share CFDs is low, 1:5 for retail clients in Europe and Australia, because single shares are volatile and can gap on news. The financing charge, typically a benchmark rate plus two to three percent a year, makes a share CFD an expensive way to hold a position for more than a few weeks, which is why CFDs suit short-term trading and share dealing suits investing.

What it costs

A share CFD usually carries a commission per trade, a fraction of a percent of the value with a minimum, plus the market spread and the overnight financing. Share dealing at the same broker carries a commission or, at some, none, plus the spread and any custody or inactivity fee, and no financing. A CFD broker's share prices come from the exchange, sometimes with a markup; a share dealing account trades on the exchange itself. Currency conversion applies to both where the share is quoted in a currency the account is not held in.

Hours, gaps and corporate actions

Shares trade in their exchange's hours, and a CFD priced from them does the same, with some brokers offering pre-market and after-hours trading at wider spreads. A share can gap sharply at the open on results or news, through any stop, which is why the leverage is low and why holding a leveraged share position overnight is a different risk from holding a currency pair. Corporate actions, rights issues, splits and takeovers, are reflected in a CFD by adjustment; a shareholder takes part in them directly.

When each makes sense

A trader who wants to be short a share, or to hold a leveraged position for days, uses the CFD. An investor who wants to own the company for years, collect the dividend and avoid a financing charge, buys the share, ideally in an account with the tax treatment their country offers. Several brokers on the database offer both from one login, and the site's broker pages record which, along with the commissions and the financing rate. Regulation is the other difference: share dealing sits under investment rules with client asset protection in most jurisdictions, and a share CFD sits under the derivatives rules described in the regulation article.