Equities and CFDs : two very different financial products

While stocks and CFDs are popular financial products for investors around the world, they differ in many ways and are suited to different kinds of investors.

A stock is a security for a share in a company, while a CFD is a derivative product for speculating on the value of an underlying asset. CFDs are often used to invest in stock indexes or directly in shares. Thus, the stock market and the CFD market are closely linked. However, these two types of financial products are not suitable for the same investor profiles or trading strategies.  

Here is a complete summary of the information you need to choose between stocks and CFDs in order to find the most suitable financial product for your profile and objectives.  

The range of products available

Stocks

The quantity and diversity of products available to investors on the stock market is colossal. Indeed, listed companies from all over the world offer their shares to traders, who can choose the size of the companies they wish to invest in.   

CFDs

Although there is also a wide range of CFDs available to investors - traders have access to products from all over the world - it is mainly companies with the largest market caps that offer these products. Thus, CFD investing is globally limited to companies listed on the major global indexes.

The strength of the investment

Stocks

• Real ownership. Buying shares amounts to holding real shares in a company. Investor's assets are thus increased, which can offer certain advantages (obtaining a bank loan, a mortgage, etc.).
• Security. The equity market is known for its security: the brokers offering these products are reputable and have all the necessary authorisations in the vast majority of cases.

CFDs

• Real ownership. As a financial derivative, CFDs have only a virtual value, so the investor does not have actual ownership of a company's shares. Therefore, CFDs do not offer any additional benefits.
• Security. Although there are many licensed and reliable brokers, the CFD market is less secure than the stock market. In addition, it is more risky to invest in derivatives via a broker based abroad.

The ability to invest up and down

Stocks

While it is very easy to buy shares, selling them is much more difficult. Some shares are simply not sellable; when they are, the investor must use the Deferred Settlement Service (DSS), which incurs additional costs.  

CFDs

CFDs allow traders to invest in both the upside and the downside of any underlying asset at no additional cost.  

The duration of the investment

Stocks

Investing in equities is particularly suitable for the medium to long term. Indeed, the costs of holding shares for periods longer than one month are much lower than in the CFD market.  

CFDs

Conversely, CFD investing is more suited to short time horizons, particularly intraday strategies, due to the relatively high overnight fees involved.   

The cost of the investment

Stocks

In the equity market, fees and commissions are about 10 times higher than in the CFD market, and include :

• Custodial rights 
• commissions for account maintenance 
• transaction fees 
• statements of appreciation

CFDs

The cost of investing in CFDs is mainly related to the payment of spreads, which can be fixed or variable depending on the broker. In addition, beyond one day's holding, overnight fees are also to be taken into account.  

Optimization of earnings

Stocks

• Leverage. Traditional stock investments on shares do not enable maximizing of capital gains through leverage. Traders will need to use a deferred settlement service and pay the fees accordingly. Leverage will still be limited to 1.5.
• Dividends. By owning shares, i.e. real shares in a company, the investor becomes eligible for annual dividends - relating to the profits generated by the company - which thus constitute bonuses received by the trader.

CFDs

• Leverage. The CFD market allows for a high degree of leverage, from 1:5 to 1:100 on stock indexes, at no additional cost to the investor.
• Dividends. As derivatives with no intrinsic value, CFDs do not generate annual dividends for investors, and are more expensive over the long term than traditional stocks.