Trading stock CFDs (Contracts For Difference) mimics trading company shares, but with a key difference: when you trade a stock CFD you don’t actually own the underlying share, whereas when you buy the actual stock you do. With a stock CFD you are entering into a contract between yourself and the CFD provider—depending on whether you go long (buy) or short (sell)—which has an entry price when you open the position and an exit price when you close it.

One major difference between trading CFDs and buying the actual security is leverage: with CFDs, you can enjoy greater leverage features because they are traded on margin, meaning you don’t need to commit the full market value of the equivalent stock position.

Here are some of the key distinctions at a glance:

• With CFD stocks you can go long or short and you are not required to deliver the underlying asset when you short-sell.

• You don’t own the underlying asset when trading CFDs; instead you enter a contractual agreement with the CFD broker to exchange the cash difference between opening and closing prices of the contract.

• Unlike holding the underlying asset, a CFD is traded on margin: you lodge a smaller initial deposit with the CFD broker, and this gives you the capacity to buy or sell multiple CFDs based on margin calculations — meaning leverage over the stock purchase itself.