What Are Shares?
When you buy shares, you become a part-owner of a company. If you buy 100 shares of Commonwealth Bank (CBA), you hold a small stake in that business. You’re entitled to dividends when they’re paid, you can vote at shareholder meetings, and your profit or loss is determined entirely by the share price moving up or down.
Shares are traded on stock exchanges — in Australia, that’s the ASX. They’re regulated, transparent, and have been the foundation of long-term wealth building for decades. Most Australian retail investors start here.
For a deeper look at share investing fundamentals, see the [Share Investing Guide](https://kolatrading.com/beginner-hub/stock-investing-guide/).
What Are CFDs?
A Contract for Difference (CFD) is a derivative — a contract between you and a broker to exchange the difference in price of an asset between when you open and close the trade. You never own the underlying asset. You’re speculating on whether the price goes up or down.
CFDs are available on shares, indices, forex, commodities, and crypto. They use leverage, meaning you only need to put up a fraction of the full trade value to open a position. This amplifies both gains and losses.
For a full introduction, read the [CFD Beginner Guide](https://kolatrading.com/beginner-hub/cfd-beginner-guide/).
Key Differences at a Glance
Here’s how the two products compare side by side:
Ownership and Shareholder Rights
This is the most fundamental difference. When you buy shares, you own something real. That ownership comes with rights:
– **Dividends**: You receive cash distributions when companies pay them out, plus franking credits on Australian shares
– **Voting rights**: You can vote on major company decisions at AGMs
– **Capital security**: In a liquidation, shareholders have a claim on remaining assets
With CFDs, none of this applies. You hold a contract that mirrors price movements, nothing more. If a company pays a dividend while you hold a long CFD position, your broker will typically credit a cash adjustment — but it’s not a real dividend, and it carries no franking credits. If you hold a short CFD position over a dividend date, that adjustment is debited from your account.
For long-term investors who value income and ownership, shares are the clear choice. For traders focused purely on price movement, ownership is largely irrelevant.
Leverage and Capital Requirements
This is where CFDs become attractive — and dangerous.
To buy $10,000 worth of BHP shares, you need $10,000 (plus brokerage). To open the same $10,000 exposure via a BHP CFD, you might only need $500 — that’s 5% margin, or 20:1 leverage.
ASIC caps leverage for retail CFD traders on Australian shares at 5:1 (20% margin). For major indices like the ASX 200, it’s 20:1. These limits were introduced after studies showed that the majority of retail CFD traders lose money.
Leverage means:
– A 5% move in your favour on a leveraged CFD might return 100% on your margin
– A 5% move against you on a leveraged CFD might wipe your entire margin
Shares don’t use leverage by default. Some brokers offer margin lending for shares, but it’s a separate product with its own risks.
Understand exactly how this works before trading: [What is Leverage?](https://kolatrading.com/glossary/leverage/) and [What is Margin?](https://kolatrading.com/glossary/margin/)
Costs Compared
The cost structure of CFDs and shares is quite different, and the gap widens the longer you hold.
**Share trading costs:**
– Brokerage fee per trade (typically $5–$20 for online brokers, or percentage-based)
– Currency conversion fees for international shares
– No ongoing holding costs
**CFD trading costs:**
– Spread (the difference between buy and sell price) — see [What is Spread?](https://kolatrading.com/glossary/spread/)
– Overnight swap charges for positions held past market close — see [What is an Overnight Swap?](https://kolatrading.com/glossary/overnight-swap/)
– Commission on some brokers (particularly for share CFDs)
The overnight swap is a critical consideration. It’s essentially an interest charge for holding a leveraged position open. On a short-term trade held for a few hours, it may be negligible. On a position held for months, it becomes a significant drag on returns.
For shares held long-term, brokerage is a one-time cost. A $10 brokerage fee on a $5,000 share purchase is 0.2% — paid once. A CFD position held for 90 days might accumulate far more in overnight charges.
**Bottom line on costs:** CFDs are cheaper for short-term speculation. Shares are cheaper for long-term holding.
Going Short
One of the genuine advantages of CFDs is how easy it is to profit from falling prices.
With shares, [short selling](https://kolatrading.com/glossary/short-selling/) requires borrowing stock from another investor, selling it, then buying it back later at a lower price. It’s complex, not always available, and carries its own costs and risks.
With CFDs, you simply open a sell position. If you think CBA is overvalued, you sell a CFD. If the price falls, you close the trade at a profit. No stock borrowing required.
This makes CFDs popular during [bear markets](https://kolatrading.com/glossary/bear-market/) or for [hedging](https://kolatrading.com/glossary/hedging/) an existing share portfolio. For example, if you hold $50,000 of ASX shares and expect short-term volatility, you could short ASX 200 index CFDs to partially offset downside risk — without selling your actual holdings.
Shares simply don’t offer this kind of flexibility for retail investors.
Tax Treatment in Australia
Tax is one of the most significant differences between the two products, and one that’s often overlooked.
**Shares:**
– Capital gains are assessable income. If you hold shares for more than 12 months, you’re eligible for a 50% CGT discount — meaning you only pay tax on half the gain
– Dividends from Australian companies often come with franking credits, which offset your tax liability
– Long-term share investors can build significant after-tax wealth through the combination of the CGT discount and franked dividends
**CFDs:**
– CFD profits are generally treated as ordinary income, not capital gains — you don’t get the 50% CGT discount regardless of how long you hold
– No franking credits on dividend adjustments
– Losses can typically be offset against other income
The tax disadvantage of CFDs for longer-term positions is substantial. A $20,000 gain on shares held for 18 months might attract tax on only $10,000. The same gain from a CFD is fully assessable.
Always consult a qualified Australian tax adviser for your specific situation. The ATO provides guidance on the tax treatment of financial instruments, and the rules can be complex depending on whether you’re classified as an investor or trader.
Risk Profile
Both products carry risk, but the nature of that risk differs.
**Share risk:**
– You can lose your entire investment if a company fails
– No leverage means losses are limited to what you put in
– Diversification is straightforward — buy multiple stocks or an ETF
– Long time horizons tend to reduce risk historically
**CFD risk:**
– Leverage magnifies losses — you can lose more than your initial margin
– ASIC requires retail CFD brokers to offer negative balance protection, so you can’t lose more than your account balance with a regulated broker
– [Slippage](https://kolatrading.com/glossary/slippage/) during fast markets can push losses beyond expected levels
– [Margin calls](https://kolatrading.com/glossary/margin-call/) can force you out of positions at the worst time
– [Volatility](https://kolatrading.com/glossary/volatility/) affects CFDs more severely due to leverage
Using [stop-loss orders](https://kolatrading.com/glossary/stop-loss/) is essential for CFD trading. Without defined exits, a single leveraged position can inflict serious damage. [Take-profit orders](https://kolatrading.com/glossary/take-profit/) help lock in gains systematically.
ASIC data has consistently shown that a significant majority of retail CFD traders lose money over time. That doesn’t mean CFDs can’t be used profitably — but it’s a warning that leverage without discipline is a reliable path to losses.
Who Should Use Each?
**Shares are better suited for:**
– Long-term investors building wealth over years or decades
– Income investors who rely on dividends and franking credits
– Beginners who are still learning how markets work
– Anyone who wants genuine ownership and corporate rights
– Tax-conscious investors who want access to the CGT discount
**CFDs are better suited for:**
– Active traders focused on short-term price movements
– Experienced traders who understand leverage and risk management
– Traders who want to go short without the complexity of stock borrowing
– Those using CFDs to hedge an existing share portfolio
– Traders wanting access to global markets, forex, and commodities from one account
If you’re new to markets, starting with shares is sensible. The learning curve is lower, the risks are bounded, and the long-term track record is strong. CFDs are a tool for those who’ve already developed market skills and want more flexibility.
Can You Use Both?
Yes — and many experienced Australian traders do.
A common approach is to hold a core share portfolio for long-term wealth building, then use CFDs for tactical short-term trades or to hedge the portfolio during periods of uncertainty. This lets you benefit from the tax advantages and income of share ownership while retaining the flexibility of CFD trading.
For example, during a period of expected market weakness, a trader with an ASX share portfolio might open short CFD positions on the ASX 200 index to partially offset potential losses — without triggering a CGT event by selling their actual shares.
This kind of strategy requires a solid understanding of both products. The [CFD Beginner Guide](https://kolatrading.com/beginner-hub/cfd-beginner-guide/) and [Share Investing Guide](https://kolatrading.com/beginner-hub/stock-investing-guide/) are good starting points.
Broker Considerations
The broker you choose matters — not all platforms offer both products, and the costs vary widely.
For **CFD trading** in Australia, brokers like [Pepperstone](https://kolatrading.com/reviews/pepperstone-review/), [CMC Markets](https://kolatrading.com/reviews/cmc-markets-review/), [IG Markets](https://kolatrading.com/reviews/ig-markets-review/), and [Plus500](https://kolatrading.com/reviews/plus500-review/) are well-established and ASIC-regulated.
For **share investing**, [Interactive Brokers](https://kolatrading.com/reviews/interactive-brokers-review/) offers access to ASX and global shares with competitive pricing. [eToro](https://kolatrading.com/reviews/etoro-review/) also offers share investing alongside CFDs.
Always verify that any broker you use holds an Australian Financial Services Licence (AFSL) and is regulated by ASIC.
Bottom Line
CFDs and shares aren’t really competing products — they serve different purposes.
Shares are for ownership, long-term growth, income, and tax-efficient investing. CFDs are for speculation, short-term trading, shorting markets, and leveraged exposure with lower capital requirements.
The question isn’t which is better in the abstract. It’s which is appropriate for what you’re trying to do. A retiree building income should be looking at dividend-paying shares. An active trader trying to capitalise on short-term price swings might find CFDs more practical — as long as they understand and manage the leverage risk.
What gets traders into trouble is using CFDs the way they’d use shares — holding leveraged positions for months while overnight costs accumulate and hoping for a recovery. CFDs are short-term instruments. Use them that way.