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Spread betting and CFDs By Sam Barrett
Making money from share dealing requires the value of the companies you buy to rise, which can be impossible in falling markets. However, even when the markets are heading south, it's still possible to make a mint. Spread betting Because they offer the ability to hedge, you can also use them to protect your investment portfolio. For example, if you have a fund tracking the FTSE 100 but expected the value to fall, you could take out a short position on a spread bet or CFD to offset any loss. Another attraction is that you don't need to tie up as much money to get the same exposure you'd get from investing directly in shares. With both spread betting and CFDs you are betting on the movement of the value of the asset, rather than physically holding it. So, for instance, if you invest £10 for every point of a share movement (where a point is equal to 1p), you get the equivalent exposure to holding 1,000 shares. This is known as trading on margin. You can also get access to a wide range of assets, especially through spread betting. "On both spread bets and CFDs you can trade shares, indices, currencies, sectors, energy commodities such as oil, and precious metals like gold and silver," says Paul Dimambro, head of operations for Hargreaves Lansdown spread betting and CFDs. Sport is another common area for spread bets, with some of the spread betting companies allowing you to place bets on the outcome of a variety of sports, including football, cricket, golf and horse racing. The market has grown substantially in the last few years. "These were fairly niche products in the late 1990s, but they're much more mainstream now; 25% of the accounts we've opened this year are for spread betting or CFD dealing," says Richard Miller, manager of active trading at Barclays Stockbrokers. How does it work? With both spread betting and CFDs, you can either take a long position, where you buy in the expectation that the price will increase and you'll make money, or a short position, where you sell and hope the price falls so you can buy it back at a profit. In both cases, you say how much you want to bet for each point the underlying asset moves, where a point is a penny for shares or a point on indices. All you will need to put down is the necessary margin. For instance, if your total exposure was £5,000 and the margin was 10%, you'd need to put £500 down to cover this. The size of the margin depends on the underlying asset. If the price moves against you, you may be asked to put some more money on account. This is called a margin call and depends on the other positions within your account. With all CFDs and most spread bets you can close your position whenever you like. This means you can decide when you've maximised your profit or get out before your loss gets any bigger. The exception to this is the quarterly spread bet, which has a set expiry date, although you can still close your position before this. It's also possible to put orders on your position. Whichever vehicle you use, you'll encounter interest charges for financing the deal. (At Interactive Investor short position 2.5% and long position 1.5%.) And whether you go for a spread bet or a CFD, you aren't actually buying or selling any assets, so you don't have to pay stamp duty. At 0.5% this can be a significant bonus. Spread betting vs CFDs Although they work in the same way there are some key differences between spread betting and CFDs, the main one being the tax treatment. Unlike CFDs, spread bets are not subject to capital gains tax. Spread bets are also commission-free, although this is often irrelevant as the spread between buying and selling is usually wider than on CFDs. Also, the commission on CFDs is only small. For instance, Hargreaves Lansdown charges 0.25% on shares and 0% on indices, and Interactive Investor 0.20% on shares. Whether you go for a spread betting or a CFD account, remember it's a high-risk activity. If you're tempted, you may want to take advantage of some of the demo accounts on offer, such as those from Interactive Investor.
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