Share trading vs CFD trading – Which is better for you?

27 Aug 2021

There are a number of different ways to invest in shares. The most well-known and direct method is share trading – colloquially known as stock trading – by investing in the shares of companies that are listed on a stock exchange.

Another well-known investment method is CFD trading. Trading CFDs, or contracts for difference, entails trading the price movements in an underlying asset – like shares – without owning the asset.

What is the difference? Both methods allow access to trading in shares but with very different mechanics, and are in turn suitable for different traders with different needs.

Here are some of the key differences.

Differences between Share trading and CFD trading

Share TradingCFD Trading
Market AccessShares, ETFsShares, FX, Commodities, Cryptocurrency, Indices
Trading HoursExchange opening hours24hrs
OwnershipFull ownership, voting rightsNo ownership
DividendsYesYes
FinanceCashLeverage
RiskLosses limited to initial capitalLosses can exceed initial deposits
HedgingNoYes
Investment HorizonBetter for long termBetter for short term

Market Access

Share trading offers access to stock exchange listed products like shares and ETFs. CFD trading offers access to a greater variety of investment instruments, like shares, FX, commodities, cryptocurrency and indices.

What investment instruments and assets are you looking to invest in? If you are comfortable with shares and ETFs, you can continue with share trading. If you would like to trade other investment assets besides shares, CFDs might be a better option for you.

Trading Hours

Share trading is only available during the exchange opening hours. In a similar fashion, share CFD trading is only available when the underlying exchange is open.

On the other hand, other CFDs like Index CFDs are available for trading round the clock along with its underlying futures contracts.

If you wish to trade shares, both share trading and CFD trading on shares offers access during the same trading hours. If you are looking for round the clock trading opportunities, then you might want to look at other CFD trading options.

Ownership

When you buy shares in a listed company, you have a stake in the company. With CFD trading, you do not own the underlying asset. This also means that in share trading, you would have shareholder privileges including voting rights. With CFD trading you would not have such privileges.

Which is right for you? That depends on what you are looking for.

Are you interested to own a part of the company and help steer its business direction? Then you would opt for share trading. Are you more interested in trading the short term price volatility you see happening with the company now? Then CFD trading is better for you.

Dividends

If a company distributes dividends, you will be entitled to receive them whether you choose share trading or CFD trading, albeit with some differences. With share trading, you will receive your dividend payout a few days to a week after the ex-dividend date. With CFD trading, you will receive your dividend payout exactly on the ex-dividend date.

Financing

With share trading, investors have to pay the full value of the shares upfront. On the other hand, CFD trading involves leverage, which means investors only need to put up a small margin to open much larger positions.

This also translates to a different level of risk involved. For share trading, your losses are limited to your initial capital. With CFD trading, your losses can exceed your initial capital.

If you prefer to pay for your entire trade position in full, you might prefer to do share trading. What if you have the same amount of capital but prefer to spread it out over a few trades without reducing your exposure? Then the ability to use leverage in CFD trading would be to your advantage.

Hedging

If you intend to hedge your portfolio, CFD trading would be preferable over share trading. Shares can only be traded with long positions, while CFD trading can trade in both directions, with long and short positions, and can be used as a hedge in bull and bear markets.

Long term or short term investing?

CFD trading and share trading can be used for both long term and short term investment strategies.

However, share trading tends to be better suited for long term investment strategies, while CFD trading lends itself to be more effective for short term investment strategies.

Why? CFD trades incur overnight funding charges, while share trades do not. On top of that, CFD trades are cash settled immediately while share trades have a settlement period of 1 to 2 working days before you get access to your capital. So if you wish to make several trades consecutively, CFD trading would provide you quicker access to your capital.

Trade CFD safely

Decided to try CFD trading? Then you need to start with a free demo account.

Phillip Futures offers Share CFD Trading on the multi-asset trading platform Phillip MetaTrader 5 (MT5). The Phillip MT5 trading platform by MetaQuotes Software, provides access to trade a variety of different asset classes on one platform.

It is integrated with a comprehensive range of technical charting tools, including the popular Trading Central indicators, as well as the Autochartist pattern recognition tool.

Right now, Phillip Futures is currently offering a zero commission promotion for MT5 customers who wish to trade SGX and US Share CFDs. There will also be no platform fees or minimum fees payable, and investors can start trading from as low as one share CFD.

To start trading, you can download the free MT5 demo account here, and open your Phillip Futures account here.


Trade CFD on Phillip MetaTrader 5 (MT5)

Features of trading CFD

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allows traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    CFDs typically have flexible and smaller contract sizes. This means that traders will be able to enter into a CFD contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFDs allow traders to perpetually hold the position(s). CFDs are cash settled, no need to worry about the delivery of the underlying asset.

Trade Shares, Indices, Cryptocurrency, Oil, ETF CFDs at zero commission on Phillip MetaTrader 5, a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Download Trading Central’s Market Buzz for updates on more topics.

What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

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