CFD Shares vs. Real Shares

Key differences between CFDs and real shares

Let us go through the main differences between CFDs and real shares in more detail, one by one.

Dividend payments

With real shares, investors who own a company’s shares on a certain date are entitled to a share of profits in the form of dividends. Dividend payments are usually announced by the company at its general meeting. The dividend is typically paid into a bank account, or alternatively into the trading account with the broker.

With CFD shares, investors do not own a real stake in the company. Strictly speaking, they therefore have no direct entitlement to a dividend payment. Instead, some online brokers offering CFD trading provide a dividend adjustment that the investor would receive if they held the real share. Always check with your broker whether they provide dividend adjustments. It is also important to find out in advance what the conditions are for receiving this adjustment.

Use of leverage

Leverage is used mainly by traders who trade frequently over short time intervals. You can use leverage on CFD shares. For example, if you want to open a new position with 10x leverage with a value of $10,000 and you have “only” $1,000 of your own capital available, you borrow the difference between the position size and your capital from the broker. The investor determines the amount borrowed themselves. The maximum leverage that can be used on CFD shares in the EU is 1:5. This means you cannot borrow more than five times the money you have deposited. Please note that using leverage is risky and you should always consult an investment professional about your decisions.

Short positions on shares

Shorting shares means that an investor sells shares of a particular company with the aim of profiting from a fall in their price and then buying them back at a lower price. In the case of real shares, trading a short position is generally more difficult. In principle, you need to borrow the real share from the broker and then sell it immediately. With CFD shares, some brokers allow you to open a short position directly and thus speculate on a future price decline.

Where to trade real shares and CFD shares

If you are planning to invest in both real shares and CFD shares, we recommend choosing a broker that supports both types of investment. eToro broker is a great choice for investors who want to trade with a low-cost broker.

In addition, eToro broker enables copying the trades of other traders, which is a very interesting and unique feature in the broker space. Thanks to this, trading beginners can share in the success as well as the failure of more experienced traders without having to spend hours studying the market or analysing accounting data themselves. Experienced investors, on the other hand, can offer (share) their own strategies and portfolios to the community for a commission. This gives them the opportunity to gain a new source of income from users who copy their trading.

Advantages and disadvantages

First, let us look at the advantages and disadvantages of real shares. A major advantage of real shares in the United Kingdom is the so-called holding period test. If you hold a share for at least 3 years, its sale and the profit from it are exempt from income tax. However, please note that this text is not professional tax advice. In tax matters, always seek a specialist in the relevant area with whom you can discuss your specific question.

Other advantages of real shares include physical ownership of a stake in the company, which gives the investor the ability to vote at general meetings and potentially receive a share of profits in the form of dividends. On the other hand, real shares require a higher initial investment because you need to buy at least one whole share, the price of which can be in the hundreds of dollars per share. While selected brokers offer the purchase of fractional real shares, the investor only gains access to some of the described advantages of real shares by purchasing one whole share, or by buying multiple fractional shares that together make up 1 whole share.

Now more specifically to CFD shares, these offer greater flexibility because you can also make a profit or loss when the price falls, not only when the share price rises. However, CFD shares do not have the benefits associated with owning real shares and depend on the contract with the broker, which can lead to increased risk, for example if a particular broker goes bankrupt. It is therefore always necessary to choose a high-quality broker, which includes the online low-cost broker eToro. Every investor should consider these factors and adapt their investment strategy to their individual and current preferences.

By contrast, a major disadvantage of CFD shares is the inability to apply the above-mentioned holding period test if I buy only a fractional entitlement (previously fractional shares, name change due to the Czech National Bank) – part of a real share.

Every investor should consider the advantages and disadvantages described and choose the investment approach that suits them, or consult a specialist.