Key Differences Between Stock CFDs (Contracts for Difference) and Direct Stock Purchases:
1. Leverage Trading
Stock CFDs allow you to trade with leverage, meaning you only need to pay a portion of the margin (typically 5x leverage, such as 1:5) to control a larger market exposure.
For example, if you wish to trade a $10,000 stock CFD, you only need to invest $2,000 in margin.
This enables you to amplify your profits even with small market movements, but it also magnifies potential losses.
2. No Ownership
When trading stock CFDs, you do not actually own the underlying stocks, meaning you are not required to pay stamp duty. However, since you do not hold actual shares, you cannot enjoy shareholder benefits such as voting rights and dividend payouts. Dividends are typically paid as cash adjustments to holders of long positions, while holders of short positions are required to pay dividend adjustments.
3. Flexible Trading
Stock CFDs allow you to go long (buy) when the market is rising and go short (sell) when the market is falling. This enables you to profit from price fluctuations in any market condition. In contrast, purchasing actual stocks typically allows you to profit only when the stock price increases.