CFDs, What are they?
CFDs or Contract For Difference work in a similar way to buying shares. You buy say 10,000 contracts which would be equivalent to 10,000 shares. You also have to pay capital gains tax on any profits you make from trading CFDs however this means you can also offset your losses against capital gains tax. That is pretty much where the similarities end.
The differences between Contract for difference and shares are: you do not own the physical shares and therefore have no voting rights in the company that you trade. CFDs can be traded on margin meaning you only need a fraction of the capital required to trade the same amount of shares. You pay no stamp duty on CFD transactions and you can trade both long and short where as with shares you can only place long trades.
So I guess you could say that CFDs are similar to spread betting with more of a share trading feel and the added sucker punch of having to pay capital gains tax on profits. That said if you make losses these can be offset against the profits for capital gains purposes.
Here’s and example of a CFD trade:
I want to buy 10,000 shares in BP at 350p. This would cost me over £35,000 in a regular share dealing account but with a CFD account I can probably place the same trade with as little as £3,500 or 10% margin requirement.
So I place a buy order for 10,000 contracts in BP at 350p.
The price rises to 400p and I sell all 10,000 of my contracts at 400p. This is a 50 point profit which is equivalent to £5,000. 50p x 10,000 = 500,000p / 100 (to convert to pounds) = £5,000.
How can I trade CFDs?
Almost all the spread betting firms such as SpreadCo, Capital Spreads and IG Index offer CFD trading but the spreads can vary so check with each CFD company for their latest spreads. All you need to do is open a CFD account with one of them and you can trade CFDs as soon as your account is open.