Okay, back to the actual process of buying a share versus buying
a CFD. When you give an instruction to a traditional stock broker
to buy a stock they ask you to deposit the full value of that trade
with them. The broker will then go into the market where they buy
the stock and hold it on account, in your name, for you. You pay
the stockbrokers commission and Stamp Duty on the purchase
(0.5% of the value of the trade). In return you receive any
dividends the company pays whilst you hold the stock and are
allowed full voting rights on any future company decisions
requiring stockholder approval. If the stock rises (or falls) in
value you can instruct the stockbroker to sell your holding and
they will return any monies from the sale that are due to you, less
their closing trade commission.
If you placed the same trade using a CFD provider how would
things differ? Well to start with, and as mentioned previously, you
don't have to buy CFD's; you can sell or go short something that
you don't own. Let's suppose, in this example, you would like to
buy a CFD on a particular stock and so instruct your CFD provider
(or place the trade yourself online) to buy a certain number of
CFD's. The CFD broker asks you to deposit only a percentage of
the full value of the contract (see trading using leverage) and
charges you a commission to place the trade but because you are not
buying the physical share you do not pay Stamp Duty.
You now own the CFD but you do not own the underlying share and
so have no voting rights although dividends are paid you at a rate
of 90% of the declared amount (remember if you have taken
a short position that you will have to pay the dividend,
normally at a rate of 100% of the declared amount). If the share
price rises in value you receive the difference between your
opening price and your closing price (CFD is a contract for
difference), if it falls in value you pay the difference between
the two figures.
It is worth remembering that whilst CFD's do not incur Stamp
Duty, profits from both CFD trading and traditional share trading
are liable to Capital Gains Tax (CGT).