Share CFDs compared with owning shares

Two transactions can track the same company's share price and be almost nothing alike. One of them buys the share. The other writes a contract about its price. The two are frequently described as alternative routes to the same exposure, and over a single day that description holds well enough. Over a quarter it stops holding, because the differences are structural: what is owned, what is funded, what accrues, what ends and how the arithmetic is calculated. This guide sets out each of those, in both directions.

What is owned 

A share purchase transfers title. The full purchase price is paid, the trade settles through the market's clearing and settlement infrastructure, and the buyer's name, or a custodian's name on the buyer's behalf, appears against the holding. The share is then an asset held in an account. It can be transferred to a different broker, held indefinitely, pledged, or sold to a third party. Once the trade has settled, nobody owes the holder anything further, because the transaction is complete.

A contract for difference transfers nothing. It is a private bilateral agreement between a client and a broker on the change in a published price, and it exists only between those two parties. It cannot be delivered, transferred to another firm or sold on. It can only be closed with the firm that wrote it, by entering the equal and opposite contract with that firm so the two net to nothing. The counterparty is therefore permanently part of the position: the firm is the party that owes the difference whenever the contract settles in the client's favour, which is why regulators require client money to be held apart from a firm's own money.

What the entitlements do 

Ownership brings the entitlements the issuer attaches to a share. A place on the register. A vote at the annual meeting. Dividends paid as income when they are declared. Participation in a rights issue on the terms offered to holders. Documentation from the company. These are not incidental to the instrument; they are what the instrument is.

A contract reproduces the economics of some of them and none of the rights. On the date a share trades without entitlement to a declared dividend, its price mechanically drops by roughly the dividend amount, and an open contract is adjusted so that the drop does not register as a market move: the side that would have received the dividend on an outright holding is credited an equivalent amount, and the side that would have paid it is debited. That is an adjustment, not a dividend. There is no vote, no register entry, no company documentation and no ability to participate in a rights issue on the holder's terms. A split is restated so that exposure is unchanged, and more complex actions follow the broker's published corporate actions policy.

What is funded, and what the result is calculated on 

A share purchase is funded in full. The money paid is the whole exposure, so the largest loss the transaction can produce is the money paid, which happens if the share becomes worthless. Nothing further can be owed on it.

A contract is not funded in full. The counterparty requires a percentage of the contract's full value to be posted and held for as long as the contract is open, and that percentage is the margin requirement. Posting margin is not paying for the position; it is collateral held against the difference the contract may come to owe. Because the difference is calculated on the full contract value while only a percentage of it has been posted, an adverse move is measured against the whole position and not against the margin, so a loss can exhaust the margin entirely and is not limited to the amount deposited. A favourable move is measured on exactly the same basis and to exactly the same degree.

What time does to each 

A settled share holding carries no running cost. It can sit for a decade without accruing anything, and any dividends declared over that decade arrive as income. Time is close to neutral to the structure, whatever it does to the price.

A contract accrues. Because the full contract value was never funded, a position held past the daily cut off carries a financing adjustment for every night it stays open, and that adjustment accumulates with elapsed time rather than with the size of the price move. Over a day it is small relative to a typical move. Over a quarter it is a line of its own, and over a year it is a material component of the result. This is the single largest reason the two structures diverge the longer a position is held, and it is why the description of a contract as a wrapper around the share is accurate over short horizons and misleading over long ones.

The other thing time does to a contract is expose it to the margin requirement continuously. A holding whose value falls is worth less; a contract whose value falls consumes the collateral posted against it, and when the account's equity falls through the level the firm sets, positions become liable to be closed by the firm rather than by the holder. A share purchase has no equivalent mechanism, because there is nothing outstanding to protect.

Direction, and how each structure takes the other side 

A purchase is one directional by construction. Gaining from a fall in a share owned outright requires borrowing the share from a holder, selling it, and buying it back later to return it, which is a separate transaction with a borrow fee, a recall risk and its own operational requirements, and it is not available to most non institutional participants.

A contract is symmetric by construction. There are two sides to the same agreement, one gaining if the reference price is higher when the contract ends and one gaining if it is lower, and neither is structurally privileged. Writing the second side requires no borrow and no locate, because no share is being sold. That symmetry is genuinely a structural difference between the two instruments, and it is also why a contract's losses are not bounded the way a purchase's are: a share can only fall to nothing, but a price a contract is written against has no ceiling above it.

Not two grades of one thing 

The comparison is often presented as a choice between a simple instrument and an efficient one, and that framing hides what actually differs. A share is an asset with entitlements, funded in full, held for as long as it is wanted, with a maximum loss equal to the money paid. A contract is an obligation between two named parties, collateralised rather than funded, accruing while it is open, closeable only with the firm that wrote it, and calculated on a value larger than the money behind it in both directions. They are different instruments that happen to reference the same number.