Shares of publicly traded companies can be traded in many ways. You can buy shares, but this is an expensive proposition requiring a good deal of capital, whereas you can trade CFDs for a small leveraged investment you get the same advantage of owning the shares. When directly trading in stocks, you are buying and selling small ownership of a publicly listed company at prices determined by the market.
Generally, if you make a wise investment choice, you can hope to make money by selling these shares of the company at a higher price than you bought them for. Provided you sell at the right time, of course! Depending on the shares purchased, you may also receive an income stream in the form of dividends.
But when trading in CFDs, you’re not actually buying and selling shares in a company. You’re making an agreement with a CFD provider to exchange the difference in the value of a contract, which is derived from the price of a share/commodity/currency/index. So, you never own the assets – you merely trade a contract between you and a CFD provider to pay or receive a price difference.
One CFD will usually be equivalent to one share, except that with a contract for difference position, SNP-500 will usually only require you to put down 5% to 20% of the actual contract value to trade. On a share CFD with a 5% margin, you can gain exposure up to twenty times as many shares for the same capital outlay compared to an investor in physical shares.
For instance, suppose you buy 5 shares of Google at $400, you would have to pay $2000 ($400 x 5). But if you purchased 5 Alphabet CFDs at $400, and the margin requirement was 10%, you would only be required to fork out $200, leaving you money to use on more trades. The net effect is a return (or loss) of 10+ times the amount using CFDs over shares due to the leverage that is employed. The fact that CFDs are traded on margin (which means that your broker is effectively lending you money) implies that a contract for difference trade attracts finance charges while a position is held, while this does not apply to the share trade.