CFDs and Spread Betting Gaining Popularity during Volatile Market Conditions

By mosesbet · Filed Under Market News, News Comments Off on CFDs and Spread Betting Gaining Popularity during Volatile Market Conditions 

For the past few months, world financial markets have been extremely volatile. FTSE hit the lowest level in 14 months recently. With no immediate measures to curtail the Eurozone debt crisis in sight, the confidence of investors in financial markets remains shaky.

According to experts, contracts for difference (CFD) and spread betting can be great trading options during such turbulent times. These products allow investors to react quickly to market variations. Investors can use CFDs and spread betting as hedge against the falls in portfolio. In case of physical stock, trading short against the same share can offer protection against sudden market downturns. The effectiveness of this option is not lost to investors who are flocking to CFD products to benefit from market volatility.

Ability to speculate without owning the underlying asset

CFDs and spread betting are almost identical. In both the cases, without actually owning the underlying instrument, you can speculate on the product price variations. The products are traded on the basis of bid/offer, wherein offer is the buying price and bid is the selling price.

For instance, consider that the quote for Vodafone (VOD) is ₤1.59/₤1.60 (price difference is the spread). If you believe that VOD price is likely to rise, you can purchase 10,000 CFDs at ₤1.60. You can buy the same number of shares through a stockbroker at the same price i.e. ₤16,000 (₤1.60 x 10,000), but you will have to spend ₤90-₤100 extra on taxes and commission.

Investors can make use of leverage

CFD being a leveraged product, you can open the same position by paying a deposit. If the deposit is 5% and commission 0.1%, going CFD route will offer access to VOD worth ₤16,000 for just ₤816. This will free up a significant portion of your capital for other trade.

Although unlikely, if VOD share price drops to ₤0, you stand to lose ₤16,000, but this can be prevented with ‘stop losses’. You can instruct your provider to close your position in case the price falls below a certain level. Spread betting involves the exact same trade, but you will be betting on pounds per point variations. Moreover, you are not liable to pay tax on spread betting and CGT (capital gains tax) on profits. But CGT may be applicable, if CFD profits cross ₤10,600 annual threshold.

 

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