Investing in shares
Investing refers to buying the actual share from an exchange with the aim to profit in the long-term. Such an investment is usually held for a number of years, in some cases even decades, before materialising profits. When you own shares you are also eligible for dividends (the amount of profit a company distributes back to the shareholders). However, this is not a stream of income shareholders can rely on, as the decision for dividends is exclusively made by the company’s management.
Such investors are less sensitive to short-term fluctuations, because they are typically focused on fundamentals and the long-term potential for profit. Buying actual shares requires dealing with an exchange and it typically involves commission fees. Another point of consideration is the fact that profits from shares trading on an exchange are subject to taxation.
Trading shares CFDs
Trading share CFDs, on the other hand, is a more frequent type of trading, which involves buying and selling with the aim to capitalize on shorter-term fluctuations. One major difference to investing is that with shares CFDs, you are not really buying the actual share. What you do instead is speculate on whether the price of a share will go up or down. Below we take a look at the key reasons that make traders chose share CFDs as opposed to owning them.
- Go long and short
Since CFD trading does not involved the purchase of the actual share, it allows traders to profit on falling prices for shares that they have never owned. The ability to go short on shares is the reason CFDs are considered a flexible form of trading.
Another important consideration is the capital required to start. When investing in shares, you have to pay the total amount of the shares that you want to purchase. This is an inhibitive factor for many aspiring traders, as it requires a substantial starting capital. Let’s say that you are confident about the price of the Facebook share and want to open a position with £200. Should you make use of a 10:1 leverage, you will be able to open a trade of £2,000.
Buying shares on an exchange typically involves a commission fee for the service provided. Although some online brokers do charge commission for trading shares CFDs, it is worth noting that not all brokers do. Doing your due diligence on brokers’ fees before opening an account is imperative.
Profits made from investing in shares are treated as income and are subject to tax, depending on the jurisdictions, as well as stamp duty in the case of UK residents. When it comes to CFDs, though, there is no stamp duty to be paid, because there is no ownership involved.