Stock Trading vs. CFD Trading - What's the Difference?

Even though the differences between stocks and stock CFDs do not seem big, there are some things to consider. More and more stock exchange traders use the "Contracts For Difference" (CFD) in their investments. These derivatives are highly leveraged and includes the possibility of making large profits with a corresponding increase in risk. Moreover, the investor can open both long and short positions without having to deal with the shoals of warrant trading.

What is the difference between a stock and a stock CFD?

In order to obtain capital for investments, companies go "public," among other things. Here, they offer their shares to interested buyers and thus have income at their disposal to finance projects, take over competitors or expand in other ways. With these "share certificates", the investor legally becomes a co-owner of the company. He even acquires voting rights in decisions at the annual general meeting, where the future strategy of the corporation is also voted on.

CFDs, on the other hand, are not real shares. They always refer to an underlying asset, i.e. a share, an index or a commodity. CFD trading is particularly widespread for currency pairs. The investor has a wide choice because almost all providers of CFDs offer currency trading. With stock CFDs, the offer is different. Mostly, only a few stocks are available for trading as CFD.

However, the client has always bought only a derivative with which no voting rights in corporate decisions are associated. Accordingly, as the owner of a stock CFD, one is not automatically the owner of the stock. Stock CFDs should therefore only be regarded as speculative objects with which one can speculate on rising or falling share prices. For long-term investors, stock CFDs are therefore suitable at most for hedging and hedging the portfolio.

What are the differences in fees?

When buying shares, the executing brokers incur very different fees. These include order fees, which are charged for each purchase or sale of a stock position. How high the order fee is, depends strongly on the broker. There are partly Online brokerwhich do not charge any order fees.

Further fees for the purchase of shares are the stock exchange fees at certain stock exchanges. The stock exchange fees are usually lower than the broker's order fee and are also incurred when buying and selling. If shares are purchased via foreign stock exchanges, additional costs are incurred here. These fees are sometimes very high and can range from 20€ to over 50€.

The fee structure for stock CFDs is completely different. There is no fixed order fee as with the purchase of shares. Instead, there are other fees, some of which are hidden. The two most important fees in CFD trading are the spreads and the overnight financing.

The costs of trading with stock CFDs

With CFDs, costs arise from the spreads that the broker applies. Let's assume he offers a CFD contract on the Dax with a difference of one index point between the buy and sell price. Then, immediately upon opening the position, the trader incurs a loss of the same amount. So the CFD buyer basically starts with a small minus in his position, depending on the size of the spread.

In addition, CFDs incur costs if the investor wants to hold his position overnight. After all, he is traveling with a considerable amount of borrowed capital, which the broker does not lend him altruistically. The amount of overnight financing depends on the respective underlying asset. Forex CFDs, for example, are often more favorable in terms of overnight financing than highly volatile individual stocks.

But overnight funding is sometimes not a cost at all, it can even be an additional income in CFD trading. For some CFD positions, overnight funding is positive. This means that the daily amount is credited to the CFD account. However, this is rather rare and only the case with a few underlying assets. Most of the time, short positions have a positive overnight funding. An example of this is short CFDs on the Volatility Index (VIX) or in Bitcoin CFDs.

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Do I also get the dividend with a stock CFD?

Who bought a CFD, which refers to a share, has as said no voting rights at the general meetings. Accordingly, many initially think that you do not get any dividends when trading CFDs. However, this is not quite true! Most CFD brokers make an adjustment in the account when dividends are paid. If you hold a long position as a stock CFD, you get the dividend credited. If you hold a short position as a stock CFD, the dividend is deducted from the margin account.

Are the price fluctuation of the share and the CFD identical?

Shares are mainly traded on the established stock exchanges, sometimes also over the counter with special providers such as Tradegate. Share prices generally form as a result of an equilibrium between supply and demand. Even though prices may differ in some cases on different stock exchanges, they are approximately the same. Through online trading, price differences on the stock exchanges are quickly balanced out by traders. This trading technique is called "arbitrage trading".

It is one of the oldest strategies and can be very profitable on some occasions. From times long past, solvent investors bought gold in Paris, for example, and then drove whole wagonloads to London and sold them there because the precious metal was quoted higher in England. Today, trading is less onerous, and in a matter of seconds you can buy cheaply on one exchange and make a profit on the next.

So with shares there is not only one price, but many different ones. CFDs generally refer to the share price. However, what is striking about CFD prices is that they are not 100% the same as prices on a stock exchange. This is due to several reasons. One reason is that the CFD broker must first commit to a price on an exchange with which to form the CFD. Another reason is the spread that the CFD broker adds and which makes the price deviate additionally when opening a CFD position. However, the price movement of a stock and a stock CFD are always the same!