CFD explainer: Share CFDs vs Direct Shares
With share CFDs, you are making an agreement with the broker to cash settle the difference between the opening and closing price, but you never own the shares directly. You are simply trading on the direction of the price.
Leverage (the ability to easily short sell) and ownership are the key differences between the two products. Share CFDs are derivatives of direct shares and are really a vehicle to express a view in the movement in the price of the underlying share. By comparison, with direct shares, you own a piece of the business.
Traders may be wondering whether or not this is the vehicle for them or whether they should switch their active trading to CFDs. Let’s investigate this.
He’re how it works
We’ll use an example of a Pepperstone trader using a Retail account to showcase a trade that went positively. For reference, the retail account allows leverage of 5:1, so a 20% margin.
A trader wants to buy $10,000 worth of Apple shares at $150 as he believes the price will go to $200. With direct shares he would buy 67 shares and need the full $10,000 to cover the transaction. With CFDs for the same $10,000 Apple notional exposure, he would also buy 67 shares at $150 but instead of putting down $10,000 he would place margin of $2000 to initiate the position - as a retail account he is required to place 20% of the total face value down.
If Apple shares go up by $50 to $200 - in both cases he makes $3350 (67 *$50), but his initial outlay was different.
Pepperstone offers traders the underlying share price and you decide on when to close. CFDs replicate all the monetary benefits of direct share ownership bar voting rights.
What’s the upside of trading Share CFDs?
- With low commissions and no minimum on US shares it means an ultra short term trader can buy or sell in short time frames and not have to pay the $10 to $15 minimum that some brokers charge.
- Then there’s Greater access if underlying shares are gated by brokers. CFDs may offer a way to speculate on the price moves of the previously untradable share.
- You could boost your profit potential with a smaller cash outlay via the leverage effect, but be aware it would affect your loss equally if the market goes against you
- CFDs are much easier to short sell vs owning the shares, and
- Trade all sessions - pre, cash and post - to access opportunities when news and moves break.
Keep in mind that CFDs carry a higher risk. State-of-the-art risk management tools can help you stay in control.
To learn about the risk management tools Pepperstone offers its clients, visit our education page for more information on making the right choice for your circumstances or try our demo.
Learn more about trading CFDS
Here at Pepperstone, our customers love the product range along with the low cost to trade and the fact so many markets are open around the clock. Interested? Watch the more videos to learn or speak to our team about whether CFDs are right for you.