Contracts for difference (CFDs) let you speculate on price movements without owning the underlying asset. By contrast, investing in shares means buying and subsequently owning a portion of the company.
Key differences:
- Leverage: CFDs are leveraged products, meaning you can open larger trades with less capital. This can magnify profits – but also losses.
- Shorting: When investing, you can only ‘buy’ shares, so you’ll only profit if the price rises. With CFDs, you can go long or short – potentially benefiting from falling markets too.
- Trade sizing: Buying shares outright can be expensive. CFDs offer more flexibility, letting you trade fractional amounts with proportional exposure but with higher risk.
Ownership: Investing in shares gives you ownership and voting rights. CFD trading doesn’t – it’s purely speculative and doesn’t involve owning the asset.
Overall, CFD trading is typically used for short-term opportunities and offers greater flexibility – but it also comes with higher risk. Investing in shares may be better suited to long-term goals, with risk generally limited to the amount you invest.