CFDs – a better bet?

By Deputy Editor Tim Bennett Feb 17, 2010

Tim Bennett

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Contracts for difference are very similar to spread bets in many ways. However we'd normally only recommend them for professional traders.

Like a spread bet, a CFD allows you to place 'up' and 'down' bets on a range of assets, from shares to currencies and commodities. An 'up' bet involves buying a contract, hoping the price rises in line with the underlying asset and then closing the bet by selling the same contract for a higher price.

'Down' bets work in reverse, with the opening trade being a sale of a CFD to create a 'short' position. The advantages of using CFDs over, say, betting by trading the underlying asset are similar to those of spread bets – it's quicker and usually cheaper to trade a CFD, and you don't get stuck holding the underlying asset.

Like spread bets, CFDs are margined products – you only put down a percentage of the value of the contract up front – typically between 5% and 20%, depending on the riskiness of the bet.

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So what's not to like? Well CFDs differ from spread bets in one crucial respect – tax. Whilst a spread bet offers tax-free gains, a CFD does not. You pay capital gains tax on profits and can use losses to reduce future CGT bills too. Next, you usually suffer a daily financing charge to run a CFD position. Keep it open for, say, a couple of months and this can add up. So, as a rule of thumb we would only recommend CFDs over spread bets for day traders and institutions such as hedge funds.

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Published in CFDs explained | More articles by Tim Bennett

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  • 1. greg

    (15 August 2011, 02:51PM)  Complain about this comment

    If you go long of a stock with a high yeald say Aviva a day before it goes x div and put on a short of the stock as a spread bet at the same time , you get the div payed into your account , the price of the stock drops by the amount of the dividend giving a profit on the spread bet short , effectivly giving you the dividend twice . Close the spread bet and run the long position of the cfd untill the share price picks up .
    Is this correct way to trade and take a profit without too much risk ?

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