Shares vs CFDs
What does your buy button really buy?
Two apps can show the same company logo, the same chart and the same green "Buy" button, and sell you two completely different products. Here's the difference, explained the Slav & Max way.
Max: "Exactly. Read what the buy button actually buys."
What is a share?
A share is a unit of ownership in a company. If you buy 10 shares of our fictional company Sunny Bikes, you own a tiny piece of the business. You may receive dividends if the company pays them, and depending on the share class, you may get voting rights.
What is a CFD?
A CFD (Contract for Difference) is an agreement with your broker to exchange the difference in price of an asset between when you open and close the trade. You never own the shares. CFDs are usually leveraged: you put down a deposit (margin) and control a larger position.
Side by side
| Shares | CFDs | |
|---|---|---|
| Ownership | Yes, you own part of the company | No, only price exposure |
| Leverage | Usually none (unless you use margin) | Usually built in |
| Can you lose more than you put in? | Not with a cash account | Losses can be large and fast; protections vary by country |
| Overnight costs | None for simply holding | Often daily financing charges |
| Dividends | Paid to eligible shareholders | Usually a cash adjustment instead |
| Who's on the other side? | Another market participant via an exchange | Often your broker |
| Best suited for | Investing and learning | Experienced short-term traders who understand leverage |
A simple example
Sunny Bikes trades at $20. You have $200.
- With shares: you buy 10 shares. If the price falls 10% to $18, you're down $20 (10%).
- With a CFD at 5:1 leverage: your $200 deposit controls $1,000 of exposure (50 shares' worth). The same 10% fall costs you $100, half your deposit.
Leverage multiplies gains too, which is exactly why it's tempting, and why many retail CFD accounts lose money. Regulators in many countries require brokers to show what percentage of their clients lose money with CFDs.
How to check what you're buying
- Look for the words "CFD," "leverage," "margin," or a leverage ratio like 1:5 in the order screen.
- Check your account type: investment/cash account or CFD/trading account.
- Read the broker's key information or risk warning page.
- Check overnight financing costs before holding a CFD for days.