CFDs vs. Physical shares

When trading a CFD you are effectively trading on a price derived from the underlying instrument and due to this you don’t actually take physical ownership. This helps in a number of ways, you do not pay stamp duty, you can profit from rising and falling markets, you can choose to trade on margin and traditionally your entry costs are smaller with CFDs.

Let’s look at an example of how you can benefit from trading using a CMC Markets Share CFD over Physical Shares.

Here is a comparison table showing profit and loss scenarios (for a £11,000 share trade), using different financing levels when trading the same share instrument over a 10 day period in profit and a 5 day period for a loss.

For full details, please view the examples below:

Example 1: Positions opened with no financing involved

You decide to buy 10,000 shares in UK Company ABC and you want to pay in full. With our new CFD offering you can do just that with customisable financing. In the table below your typical costs with a broker is displayed on the left while the costs with CMC Markets are on the right.

Example 1: Both Physical and Share CFD positions opened with no financing involved.

A few days later the share price of ABC rises to 120.00p and you decide that it is time to sell and take some profit. You will notice your overall profit trading with CFDs is higher due to the lower entry costs into the market

Scenario 1: Share price rises to 120.0p – you sell to take profit

If the price of ABC fell in value over the same time to 105.00p and you decided to close out this trade, your overall loss would also still be smaller due to these lower costs.

Scenario 2: Physical share price falls to 105.0p – you sell to limit loss

Example 2: Using optional financing built into CFDs: 50%

You again decide to buy 10,000 shares in UK Company ABC but this time you don’t have the funds on account to finance the whole transaction and would like to finance 50% of the trade. With built in customisable financing you can do this with our new CFD offering. In the below example you will borrow £5,502.75 and deposit the remainder. You will only incur an interest cost for each night you hold the position after 17:00 New York time.

Buy 10,000 shares in UK Company ABC and use 50% financing.

A few days later the share price of ABC rises to 120.00p and you decide that it is time to sell and take some profit. Your overall profit is still higher, even when you factor in the interest cost of £3.77 for holding this position for 10 days.

Scenario 1: Physical Share price rises to 120.0p – you sell to take profit after 10 days

If the price of ABC fell in value to 105.00p over the first 5 days and you decided instead to close out this trade, your overall loss would also still be smaller due to these lower entry costs.

Scenario 2: Physical share price falls to 105.0p – you sell to limit loss after 5 days

Example 3: Using maximum financing built into CFDs: 95%

Leverage can be a powerful tool and you might instead like to take out this trade using the maximum financing available. On shares this can be as high as 95%. If you were to do this you would only need to deposit 5% of the Total position size to secure this trade. You will only incur an interest cost for each night you hold the position after 17:00 New York time.

Buy 10,000 shares in UK Company ABC and use 95% financing.

Ten days later the share price of ABC rises to 120.00p and you decide that it is time to sell and take some profit. Your interest expense has risen, from the 50% financing example, as you have borrowed more to take out this trade. Financing Cost is now roughly £1 a day, suggesting you could hold this position for approximately 2 months, before trading this CFD position became more expensive than Physical shares. Remember though, over this time you have not locked in all your capital and could in principle use this for other trading opportunities.

Scenario 1: Physical share price rises to 120.0p – you sell to take profit after 10 days

If the price of ABC fell in value to 105.00p over the first 5 days and you decided instead to close out this trade, your overall loss would also be smaller due to these lower entry costs.