In fact there is a whole industry out there behind the trading industry; spread betting software and systems and coaches all willing to help give you a hand and willing to teach you about the markets and how to analyse a market’s direction; all this for a fee of course. This makes me wonder whether it is easier to make money teaching how the markets work than to actually try to make a living spread betting.

In any case if you are still a beginner one of the best things you could do is to start reading some trading books about technical analysis and psychology. There are a lot of trading books that have been published over the years and most of what has been written which applies for normal trading is good for spread betting as well; after all spread trading is just a way of trading on a market direction. Another tip is to try to find a mentor – someone which you are able to discuss the markets and share your trading experiences. Try to see if you have someone in the family or colleagues that already trade the stock markets; this is one of the most common and better ways to get a grasp of trading.

If you can’t find anyone, then maybe, just maybe consider attending a spread betting seminar but watch out for the sharks out there; you shouldn’t have to pay more than 500 quid for attending a trading course that doesn’t last for more than 4 hours! Some trainers charge ridiculous amounts of monies for attending a course and it is obvious that these people make money from teaching and not from trading. Imagine attending a training which charges you 2000 quid just for a weekend course. This all for the privilege of attending one of their training seminars and listen to some trading guru telling so-called secrets of trading and how after attending his course you will be able to trade and make unlimited sums of monies from trading the markets. This is very far away from the truth, trading requires a long-term commitment and if you are in it for a quick buck you can as well stop here because your journey will lead to failure.

Learn more about spread betting with our free financial spread trading course on the subject.

Most CFD providers offer competitive commission rates and comprehensive access to a research and charting center.  The commission rates on shares typically ranges from 0.1% to 0.2%.  Trades can be made over the telephone or the online trading platform.

Financing Fees

When you trade CFDs you may incur daily financing charges on positions held overnight.

If you are long, you will be paid interest; if you are short, you may receive interest.  On shares trades, for instance, overnight long positions will typically be debited a financing charge of LIBOR + 2.5%, while short positions will be credited finance of LIBOR – 2.5%.

For instance, if a trader was paying a long CFD funding charge of 2.5% over LIBOR and LIBOR was say 1.5%, the investor would be paying a funding rate of 4% per annum.  Suppose that the total trae value was GBP 10,000 the funding charge would be about GBP1.10 for every day the position is held open. (GBP400/365 days)

Dividend Adjustments

A dividend adjustment is usually credited to long positions and debited from short positions held at the close of business on the day before the ex-dividend date.  Payment is credited or debited to your trading account over the ex-dividend date.

Read more about contracts for difference on our CFD trading course.

(copyrighted to Andy Richardson August 24, 2010)

If you make 100s of trades a year, the extra spread you pay with spreadbets will likely come out more than the tax you save.

In the past there used to be bigger tax advantages to spread betting. But these days you get a 10K tax free Capital Gains Tax allowance (+ another 10K if you have joint account with your spouse) and then its only 28% after that. So there really isn’t that much of a tax incentive to go the spread betting route if you bet reasonably often (the extra spreads imposed over a year’s of betting add up and eat into most if not all the 28% tax saved).

Thus, I think that today the tax-free advantaged status of  financial spread betting isn’t as great as it used to be when you compare it to direct access with x number of trades. With a spouse’s Capital Gains Tax allowance added to yours, you can make 20K on direct access before you pay Capital Gains Tax at 28%. Compare that to the spreads you pay over a year and direct may be a better route to go down.

What About Stamp Duty?

Active traders find that stamp duty can take a big chunk out of their profits. Using a spread betting or CFD account is one of several ways they can eliminate this extra cost.   In the UK, spreadbetting is regarded as gambling as opposed to trading and therefore is not subject to tax which means there is no tax on gains, but it also means that you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading.  I suspect this arrangement suits the Revenue for good reason.

So should I go with Spread Bets or CFDs?

When starting out, spread betting is a sensible way to go.  With the gambling/trading tax laws (e.g. no tax versus 0.5% stamp duty on shares (which is sickening), it is in everyone’s interest to have a spread betting division which is then at least partially hedged. Even high street banks have spread betting divisions. I have had no problems at all with that.  Later on, it’s probably worth moving onto DMA CFDs (which again are trivial to short), but you probably need £30k+ to make it worthwhile.  Until then it is probably cheaper/easier to just pay the spread.

(copyrighted to Andy Richardson July 29, 2010)

CFDs (Contracts For Difference) add another aspect to your trading strategy, they are leveraged trading products meaning you can ‘buy’ a quantity of shares for substantially less money than buying physicals, or ‘buy’ substantially more than you would normally be able to, or want to! You never physically ‘own’ the shares but receive dividends as if you did, similarly if you are ‘short’ you owe any dividends payable.

So are CFDs similar to holding Shares?

A contract for difference is almost exactly like buying and selling the underlying shares but you do not get any voting rights or company reports. Moreover, the interest charges are different to savings accounts because it is normally LIBOR + X%. So it might end up costing you more in the long term to be LONG shares via a CFD than it would if you bought the underlying asset. But if you are a short term-trader this may make little difference.

Investors can benefit from CFD trading from an increase or decline in an instrument. For example:

Scenario 1: Profit from a Correct Anticipation of an Increase in a Share Price

A trader enters a contract to buy 2,000 share CFDs at $10 per share, equivalent to a long position of $20,000 The deposit requirement (aka margin requirement) for this position will be $2,000, based on the stipulated initial margin of 10%. In the circumstance that the share price goes up to $11 per share, the trader could close the position by selling the CFD making a gross gain of profit of $2,000 (excluding charges) in the process.

Scenario 2: Profit from a Correct Anticipation of a Drop in a Share Price

A trader enters a contract to sell 2,000 shares as CFDs at $10 per share, equivalent to a short position of $20,000. Again, the deposit requirement to open this position will be $2,000 (assuming a 10% margin requirement). In the event of a price decrease to $9 per share and a closure of the position through a purchase of the CFDs, the trader will make a gross profit of $2,000 (excluding charges) through his strategy of selling high and subsequently buying low.
Uses and Risks of CFDs

Popular trading strategies of contracts for differences include hedging an existing shares portfolio or hedging share options, taking a directional view of the market (ability to go long or short) and pairs trading. Trading in pairs involves going long in respect of, say, Anglos and shorting, say, Billiton’s, thus creating a portfolio that incorporates your view of different stocks within similar sectors, or an investor could even take a view on different sectors.

Through placing a comparatively small amount of margin with a CFD provider, the investor can obtain massive exposure to the underlying reference instrument. Thus the investor has a ‘turbocharged’ trading tool that he can add to his arsenal of weapons. For this reason when trading CFDs, the profit rewards can be significant when you compare the potential gains to the lower cost of entry. Equally so can the potential losses be significant if the investment price goes in the opposite direction.

CFDs in a Nutshell -:

1) A CFD is a DERIVATIVE, you do not own shares in the companies you take contracts on.

2) A CFD can be a leveraged product and they are called Contract For Difference because they are exactly what they say on the tin. You make (or lose) money on the DIFFERENCE in the price you open your contract and the value of the underlying asset.

example / If you went long on company XYZ shares with a CFD@£1.00 then you will make money for every penny XYZ shares move above £1.00 ie/ The difference. Conversely you will lose the difference for every penny they fall below £1.00

3) You can go LONG or SHORT at any time markets are trading unless there is a Short selling ban in place like earlier this year on financials.

4) CFDs do not expire.

5) If you go long, you pay interest on the CFD but you earn dividend payments.

6) If you go short you earn interest but pay out dividend costs.

(copyrighted to Andy Richardson July 22, 2010)