Contracts For Difference (CFDs) are legal contracts binding to parties; the ‘buyer’ and the ‘seller’. There almost similar characteristics as spread betting and on top of that have some tax benefits over regular share trade that is, of course, depending your circumstances. Any financial expert or individual that has an excellent understanding of the market could use CFDs to hedge themselves against unexpected swings in the market values.
Under this particular contract, the seller is obliged to pay the seller the difference between the value of an asset at the inception of the contract and its value when the contract expires if the price moves in favor of the buyer. However, if it moves against the buyer’s expectation, then the buyer is required to pay the seller the difference instead.
CFD trading has become very popular and within the last decade has evolved from being an institutional product to one that is hugely traded by the market. It is seen to replace soon the traditional shares trading as the preferred product for its flexibility and cost-efficiency in trading. CMC Markets are seen as the market leaders in the CFD arena, with a stable and reliable trading platform.
CFDs allow you to leverage your returns; while buying via traditional stockbroker entails paying the full purchase price using CFDs could create the same exposure but with less cash. Also, CFDs allow you to trade markets from one to ten percent margin. This situation could be get perceived as borrowing for business, and its effect is to increase the potential gains or losses to up to ten times since a two percent rise in the price of a share would result to twenty percent return on your initial outlay. What’s more, you do not have to pay capital tax, but you do have to pay interest on the loan amount. Do not worry, though, the loan interests don’t usually work out to be much. Below are more of the advantages of CFD trading.
Transact on a rising or even falling markets
As with all markets all over the world, business could go up or down. CFD trading will see you profit from both situations as the trade is on the basis of price movement of a financial instrument without it being in your possession. Thus making it easy to sell and buy a CFD depending on the market.
To illustrate this, in a rising market, a trader would buy a CFD position first and then sell it later to close out their position at a profit. This transaction is otherwise known as ‘going long.’ In a depreciating market, a trader would look to sell CFD position first and then buy it later to close out their position a situation called ‘going short.’
No stamp duty
A significant advantage of CFD trading is that you do not pay any stamp duty or are not required to pay any fees, as you are not making an actual physical purchase. However, by the same contract, you will not have any rights as compared to a shareholder this is especially with regards to voting.
Efficiency of use of capital
Among the principal upsides of CFD trading is that you can transact comfortably without having to use the position’s full value, and since your money does not get stuck to one transaction, you can use them to invest on other items in the market.
For instance, to acquire the equivalent of 4,000 of any company share CFDs with your broker, you may be required to deposit say 5% of the position’s full value that you might have, to pay for them.
If a single share cost £150 then you would only need to put £300 of position margin (5% of £6,000 = £300) in addition to the applicable commission according to your broker. However, to make the same trade with a stockbroker, you would have been subjected to the whole amount of £6,000 on top agreed commission and the required taxes.