Stocks with or without leverage? All about share trading with CFDs

The difference between stock trading and stock trading via a Contract for Difference (CFD) is that the latter can be leveraged. In addition, you don’t buy and own the share, but instead enter into a contract with the CFD provider, who has an entry price and an exit price. This is then called trading shares.If you take a long position with a share CFD (e.g. Tesla share), then you speculate (trade) that the underlying asset will rise. If this expectation is fulfilled, the CFD broker will give you a higher price on exit than you paid on entry. With a short position it is exactly the opposite. So you trade with a CFD on rising or falling prices: you trade shares with leverage.

CFDs are traded with margin, which means you don’t have to bet the full value of a comparable stock position. As a trader, you can open larger positions than your equity can cover. You can also trade with leveraged stocks, but the leverage is lower than with CFD trading.

The Leverage Shares

Stock CFDs are leveraged financial instruments that allow you to trade stocks with leverage. The underlying asset is increased by having your broker provide you with a share leverage. This means that to open a position you only need to provide a percentage of the value of the position yourself. This equity portion is called margin. Your deposit usually varies depending on the size of your CFD position.

If the market moves in your favor, the stock leverage multiplies your profits. However, there is also the risk of multiple losses if the market moves in your favor. Therefore we strongly recommend that you protect your stock trading with adequate risk management. You should always be aware of the risk you are taking. You should accept the offers of CFD brokers who provide you with a wide range of free educational opportunities where you can use articles, analysis, training and live webinars to expand your knowledge of trading CFDs.

Important differences between shares and CFDs

If you as a trader are faced with the question of CFDs or shares, you should note the following important differences:

CFDs on stocks such as Tesla or Facebook, as well as CFDs on other stocks can be traded long and short. In the case of a short sale, you are not obliged to actually deliver the underlying asset, as you have only speculated on its performance.

As an investor you do not own the underlying asset of the stock CFD, but conclude a contract with the CFD broker. The subject of this contract is the difference between the entry and exit price.

A CFD is traded with margin, which means that the trader makes a deposit with the CFD broker and then, using leverage, can trade a larger amount than his equity.

Typically, CFD brokers such as BDSwiss or Admiral Markets require you to deposit between 5 and 25 percent of the volume traded. So with stock CFDs you have the opportunity to trade up to 20 times your deposited capital.

Here is an example of a calculation: Let’s say you want to buy 5 Tesla shares at 1000 US dollars each. This would cost you 5,000 dollars. However, if you buy 5 Tesla CFDs at $1000, with a margin requirement of 5%, it would cost you only $250. You can invest the money you save in other trades.

The net effect of the leverage is 20 times the profit (or loss) of the CFD compared to the ordinary share. Since you trade a CFD on margin, your broker will lend you the remaining funds, for which there is a fee if the position is held overnight. However, there is no fee for holding shares, as you have spent your own money on them. Typically, the fees are based on the full market value of your opened CFD position, and are charged by your broker.

The biggest risk of leveraged trading is, of course, losing more than you originally invested. However, this so-called obligation to make additional margin payments has not existed in Europe since mid-2017. You can therefore, despite the use of leverage, only lose your investment. You can also lose your investment in shares if the company goes into insolvency and is wound up. On the other hand, as a shareholder you have certain voting rights in important corporate decisions.

Share CFDs can be traded on the trading platforms MetaTrader 4 and MetaTrader 5. However, before you start live trading, you should familiarize yourself with the software in a risk-free and free demo account.