Oct 07
19
When to Spreadbet, Use CFD’s and Finally….Shares!
Many private investors have recognised that having a share dealing, spread bet and contract for different (CFD) account, in their trading arsenal, allows them to use the right tool for the right job, maximising potential profit opportunities. Although it’s no secret that more and more people are opening spread betting accounts these days, with the larger brokers seeing over 300 applications per week.
But the real question is when to use which instrument for which job?
Generally speaking for short term trades (those lasting a few days), Spread betting the cash price has become very popular – with no capital gains tax on profits, extremely competitive pricing in a now very liquid instrument and no stamp duty to pay, it really is difficult to beat.
However, the nature of the dealing relationship with spread betting, means unlike share dealing and cfds, you are, for the most part betting against the broker and hence there is little incentive for the broker to work with you to price improve – also losses incurred on spread betting accounts, cannot be offset against tax.
For longer term investments, we should compare share dealing with CFD’s or contracts for difference.
CFD’s whilst allowing tremendous leverage over regular share dealing, incur a funding cost.
This funding cost is approximately 3% on the 90% of the position that the CFD provider has effectively lent you. Traditional share dealing incurs a 0.5% stamp duty charged upfront. So there is a point where the CFD funding costs overtake the costs incurred from the share dealing costs, and this is around the 10-12 week mark- thus if you are intending holding a position for less than 3 months, you are generally better off with a CFD.
Thus in summary, if the length of you investment carries the following time frame, these are your options:
For 1 day to week – Use spread betting
For 1 week to 3 months – Use CFD’s
For 3months+ – Use Shares
Good luck with your trading…
Greg
