Many private investors have recognized that having share dealing, spread betting and contracts for difference (CFD) accounts, in their trading arsenal, allows them to use the right tool for the right job, maximizing potential profit opportunities. Although it’s no secret that more and more people are opening spread betting accounts these days, with the larger brokers seeing over 300 applications per week.
But the real question is when to use which instrument for which job?
CFDs are liable to capital gains tax at the investor’s marginal tax rate after the annual allowance has been surpassed, while gains from spread bets are tax-free so that appears to give the latter a distinct advantage. That works both ways of course in that, losses incurred through spread betting are gone for good, whereas losses on CFDs can be used to offset capital gains elsewhere, and can be rolled forward. There is also an annual capital gains tax allowance. No one places a trade intending to lose money, but the reality is that some trades will be loss making and the tax situation deserves some consideration.
Generally speaking for short term trades (those lasting a few days), spread betting the cash price has become very popular – with no capital gains tax on profits, extremely competitive pricing in a now very liquid instrument and no stamp duty to pay, it really is difficult to beat. However, the nature of the dealing relationship with a spread betting company, means that unlike share dealing and cfds, you are, for the most part betting against the broker and hence there is little incentive for the broker to work with you to price improve – also losses incurred on spread betting accounts, cannot be offset against tax.
For longer term investments, we should compare share dealing with CFDs or contracts for difference. CFDs whilst allowing tremendous leverage over regular share dealing, incur a funding cost. This funding cost is approximately 3% on the 90% of the position that the CFD provider has effectively lent you. Traditional share dealing incurs a 0.5% stamp duty charged upfront. So there is a point where the CFD funding costs overtake the costs incurred from the share dealing costs, and this is around the 10-12 week mark – thus if you are intending holding a position for less than 3 months, you are generally better off with a CFD.
Thus in summary, if the length of you investment carries the following time frame, these are your options:
For 1 day to 1 week – Use spread betting
For 1 week to 3 months – Use CFDs*
For 3 months + Use Shares*
With current global interests being very low, the situation is even more advantageous for CFD trading and it would be perfectly practical to holding onto a position for 6 months.
Spread betting in general, if you are trading using even moderate amounts, is not the most cost effective way of trading in the markets. Direct access is far more cost effective and you have far greater levels of control. You can trade 24 hours if you want. There is very little whining on the internet about Direct Access. People just get on with it. If you trade the market price then your fill is your fill – end of story and if it isn’t what you wanted, then tough luck. If you use a limit order, then if someone fills your order, all well and good. If not, tough luck. That’s life. In fast moving markets you don’t get the fill you want because things change in the time it takes between your brain saying press the button, you pressing the button, the message going from your PC to e.g. LCG, the order being processed and accepted/declined. Now LCG may not be the best provider for forex trading because of the human intervention aspect. But that’s the way it is. However, if you are not satisfied with what you get at LCG then go elsewhere e.g. CMC Markets (and I’ve seen enough complaints about them in the past as well although they seem to have finally got their act together). It is entirely up to you.