Spread betting and Contracts For Difference have the potential for high returns, but investors must nevertheless be cautious of the carried risks.
Mitigating risk is sometimes ranked as among the high priorities of investors. However, for those with a higher risk of tolerance, CFDs trading and spread-betting regardless of whether the market is most likely going up or down, is undeniably the name of the game.

At first instance, there appears to be a small difference between spread betting and CFDs. Both are similar in that they are derivative products, with investor judging whether the cost of an underlying investment will fall or increase. Moreover, both allow investors to go for short or long and are pretty much regarded as leveraged products, hence a small deposit may allow for an investors to receive substantial market exposure to an underlying asset. Unlike traditional share trading on derivative products, investors won’t have to pay for stamp duty.

CFDs tend to be associated with real assets such as shares, commodities and currencies, whereas spread betting takes place on markets that are made across a far wider range of activities such as the outcome for sporting events.

Spread betting allows investors to predict movement on the price of several thousands of financial markets and make profits or losses primarily based on that movement. Basically regarded as a form of gambling which means that any winnings are exempt from capital gains tax.

It carries a far greater risk than conventional gambling mainly because it allows gains or losses of more than what was previously invested. Basically, when people spread bet, they usually do so on a margin with consumers ideally required to have between five and ten per cent of the value of their open positions on deposit with the trading company.

A second differentiator can even make spread betting more appealable when long CFD positions entice daily finance charges. For example, CFDs which were left open overnight will result in a charge being levied upon on the account. Hence, traders doing so should consider the daily funding charge that is applicable in their calculations.

Investing commonly will not be enough to pay commissions on spread bet. The brokers charges normally be would included in the spread. Moreover, quoted prices of CFDs, would typically match the underlying market which follows the business commission charges to be carried out correspondingly with the trade. Naturally, the capital gains tax exemption set aside, the profit and loss for both is often comparably considered equal.

The undeniable risk involved with trading CFDs, on assets or shares denominated in almost anything other than sterling can sometimes be very hard to alleviate. With spread betting, positions are all strategically placed in sterling and adjusted per point so even when trading on foreign equities, currency risk is never an issue.

A good number of investors will probably choose to hedge against a more physical and broader portfolio. Even with due diligence, hedges can be an influential tool to better safeguard one’s investment. A short-term hedging strategy is a defensive move wherein it will reduce the probability of striking losses and provide better chances of striking greater profits.

CFDs are collectively a straightforward way to hedge, but the key is in appreciating the product itself as well as the tools of the trade and the risks it carries. Stop-losses for instance is a tool used in the trade to ensure that a platform will close the position if the price moves against the trader’s advantage and reach a level they are no longer willing to place their investments. More importantly, as with any investment for that matter, taking a sound advice and careful study are just two of the basic approaches to afford limiting losses and maximising profits.

Last Updated: February 2nd, 2021