Investing in the Markets without Buying Shares: CFD Trading
A CFD (Contract for Difference) is an arrangement between two investors to trade on the difference between the start price and finish price of a contract at the end of an agreed timescale without either party needing to buy the shares themselves. Although sounding complicated, it isn’t. Institutions and hedge funds have utilised Contracts for Difference in the UK stock market for just over ten years instead of regular stock market trading. CFDs have much in common with financial spread betting in that both of these are margined products so you can gear yourself up or actually take a decision that is a multiple of your available funds.
So think about it from the point of a margin on a firm youre interested in, if it was 10% establishing a position of £100,000 would really only require a deposit of £10,000. Any running profits you make can be used as margin to establish new positions but any running losses would have to be made good by reducing your position or providing additional funds.
While stamp duty of 0.5% on all UK share purchases has in the opinion of some traders reduced the cost effectiveness of ‘day-trading’ traditional stocks and shares, both CFDs and spread betting are exempt and this has actually added to their appeal. CFDs are liable to capital gains tax whereas spread bets are tax free, but losses incurred from spread bets are gone for good while CFD losses can be offset against future profits for the purposes of tax. When you actually trade in CFDs you purchase those contracts in nearly the same way you buy shares. So if you wanted exposure to 1,000 shares in a company, youd have to sell 1,000 contracts at, say, 494p per contract rather than simply placing a £10 per point bet with spread betting to get a similar return.
Most CFD providers admit you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. With CFD you are the cost maker, which is why hedge funds tend to use CFDs rather than spread betting. CFDs do not enfold the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. Because of this, the CFD spread quote will constantly be very close to the underlying price of the share or commodity that you are following. CFDs also mimic nearly every aspect of owning the underlying share or market, so if you hold a position for a long enough time period you will recieve the benefit from any dividends being paid on the shares.
CFDs and spread betting have particular features that will appeal to different trading styles and there is no one best instrument to use. However they should not be regarded as substitutes for long term investment or saving, as more people seek to take control of their financial destiny, theres been a growing realisation that going short is a legitimate means of trading in market thats become progressively difficult to profit from in a traditional sense.
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