Most of us are familiar with the stock market – whereby investors buy shares in a company and then make or lose money depending on the company’s performance as well as other factors such as the economic situation. There are many ways of using the stock market to get a return on your money, the most familiar and traditional of which is share-trading. This is where you buy shares (or get a broker to do so on your behalf) then sell them when – hopefully – their value has gone up.
Two less familiar ways of making money on the stock market are CFD trading (‘Contract for Difference’) and spread-betting. Because the two have many similarities, one of which is relative complexity when compared to share-trading, we’ve written this straightforward guide which should help you decide which one is right for you. Both CFDs and spread-betting allow you to invest in the movement of a stock without actually buying shares. They are very useful when the market’s volatile as the more movement there is, the more potential profit for traders. You can earn when the market goes down as well as when it goes up. With CFDs, you can gain access to the profit-making potential of many more shares than you could afford to buy outright.
However, they also expose you to much greater losses. Although the only money you put up is a deposit (say, 5%), you could end up losing that, and much more besides, if there is a movement in the wrong direction and you don’t get out at the right time. You can buy CFDs with a ‘stop’ which limits your losses. CFDs are subject to Capital Gains Tax, but you can also offset your losses, unlike spread bets. Spread betting positions offer the same opportunity as CFDs to invest in a position without buying actual shares. Like CFDs they are exempt from Stamp Duty but unlike CFDs they are also exempt from Capital Gains Tax (CGT).
However, there is a premium included in the initial price, and the bet is time-limited, unlike a CFD where you get out when you decide to. As well as spread-betting on shares, you can bet on pairs of currencies on the foreign exchange market. CFDs attract CGT and spread-bets do not, but they may still be your best option as an investor, particularly if they are part of a portfolio of investments that includes actual shares. The difference is in the price – you can get into the market without the spread-betting premium, and charges can be subject to negotiation rather than ‘take it or leave it’, as is the case with spread-betting. It’s important to note that CFDs and spread-betting are both higher-risk ways to play the markets. The gains can be high, but so can losses.