Are CFDs a better trading instrument than Spread Betting?
The only good thing about spread betting versus CFD is tax, i.e. no CGT. However there is a lot wrong with spread betting. The main problems are:
- The spread. Therefore not suited to day trading. No chance of trading inside the spread as you can with cash equities/CFDs.
- The skew (which is the worst). Say you're SBET the FTSE100 index. The cash= 4698. The spread is 6pts and 4695-4701 is offered. The markets starts to rally up and you buy just as the spread betting company skews the price to 4698-4704 (still 6pts). You pay 4704. The index climbs 10 points to 4708. Momentum drops and you want to close. However the price offered is 4702-4708. You now hold a losing position even though the market is up 10 points. This is skewing. Also not suited to day trading.
- Sticking closings. You can open a position easily enough but when you try to close it won't close. You are constantly 're-quoted'. This is the spread betting company waiting for the market to move into its favour. Say the close has 'gone of to be processed' and you are staring at a rotating egg timer, when the deal is done and get the info back don't be surprised if it was done at a worse price!
- Reading of customer positions. If someone is about to make a large profit/loss they will skew.
- They want you to lose. Even if the spread bet companies claims to hedge your position (cash/futures market) they may not always do it and it may only be a %. Since they do not charge commission they want you to lose.
- Position is hedged either in the cash or some other method and your trades will be executed in fractions of a second. So whether you win or lose the CFD provider doesn't care. They still get their commission. However they prefer you to win as you will come back.
- You get the broker improvements as if you were buying the regular equity.
- It's the tool of the professionals and company hedging is done using CFDs and not through spread betting.
- You pay whatever the underlying cash trades at. No skew. No additional spread. Because the commission is charged separately CFD trades are usually closer to
the underlying price of the market and spreads are tighter than those offered when spread betting
Spread betting is however useful for longer term trades. With some nerve (e.g. large bets) you can make a lot of money which is all tax free.
Lots more spread betting around. Seen as entry level. As you know most new market entrants join on the notion of making large sums and spread betting with its tax free perks fits the bill.
As more is learnt you realise that CFD Trading offers better day to day opportunities. As yet more is learnt you realise that futures contracts is where you should be.
I trade the index (dow and ftse) using futures contracts. In time you will most probably start trading these. They are cheaper (around half the price of CFDs and even cheaper with some brokers), the spreads are tighter. With the FTSE 100 contract the spread is 0.5pt, i.e.12 times tighter than a 6 point spread. Also the futures market is the MOST liquid and has the most players.
So, to sum up what I'm trying to say:
- If you trade small caps with large-ish amounts of money £5,000-£25,000 per share, the best method, imo, is a CFD account that offers online RSP dealer facilities (IG Markets being the only one that I know of).
- However, if you're rich enough not to need to trade on margin at all then you may as well just stick with a normal share dealing account.
- If you trade in small amounts (always under £5,000 worth of shares) then spreadbetting is probably the best option).
- For FTSE 350 stocks spreadbetting is definitely the best option, because low commissions/spreads anyway (plus no CGT).
Whichever option you choose, you should, imo, treat it as if you're buying and selling shares and use the freed up cash (i.e. 75% for small caps) to pay off your credit cards or put in a high interest savings account or whatever.