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Hana Lannister

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  1. CFDs Vs Spread Betting - Differences in a nutshell *Spread betting prices are synthetic - based on the actual market price but set by the provider which means that the price you trade is not the price you see on Level 2 (typically, the spread will be wider than the market price as the provider adds a bit in for his commission). Spread betting firms post their own 'take it or leave it' price exactly as a bookie would, whereas with a CFD, you are the price maker. By contrast, a DMA CFD provider will allow you to post orders anywhere within the bid-offer spread to check click here. In general CFD prices are the best bid and offer prices from the actual offer and if you have direct market access you can actually trade on even better terms. What this means in practice is that trading contracts for difference can work out cheaper than spreadbetting and that costs are often more clear as the CFD spread quote will always be very close to the underlying price of the share or commodity that you are following. *One important difference between spread betting and CFDs relates to the counter-party. When you take out a DMA CFD either long or short it is technically a position against another trader (hence the name). Your CFD provider makes his money on his commissions and the interest charge he will levy every 24 hrs. If you lose money on your trade beyond these costs, your CFD provider doesn't make any extra money. Instead when you take on a spread bet, you're taking a bet against the spread betting company. They hedge your position internally or on the markets but they have an inherent interest in you losing on your bet. Not only do they make money on the spread and through commissions and perhaps financing over time, but they will make more money if you lose on your trade. This is something worth remembering. There's a reason spread bets are classified as gambling and are tax free. *By definition spread betting providers are market makers meaning that they have the freedom to quote their own prices at their discretion (although they do say that they follow the market as closely as they can AND in fact the MiFID financial directive obliges them to do this). So in practice they CAN'T quote any price they want although there are cases where a spread betting company doesn't follow the rules as applied by the industry. This means that occassionally you might find it hard to exit a trade or give too many re-quotes, freezing and such but by large things have improved dramatically over the past years and I believe this will continue as the competition increases. *When dealing in Shares you deal in the number of Shares not £'s per point (1000 Shares not £10 per point) although the exposure is the same. So for instance if opening a CFD position in say NEXT (NXT: LON) this would be quoted in the same way as if a normal share purchase was being made. i.e. 'buy 1000 Next CFDs' - with spread betting you are technically betting on the price movement of the share so the equivalent trade would be 'buy Next at £10 a point', where a point is a 1p movement in the share price. Note that the exposure is still essentially the same. In both cases, you simply 'buy' if you think that the price is set to rise, or vice versa. *With CFDs, positions are denominated in the currency of the underlying asset so if you're betting on Gold, your profits or losses will be in dollars, and if you're speculating on a Swedish Share, it'll be in Swedish Kroner. Even commodity prices may be set in alternative currencies - gold is denominated in dollars. If you were to place a spread bet on Gold or an overseas security your profits and losses would still be in sterling which makes spread betting more convenient for retail investors. In practice, however, most CFD trades take relatively short-term positions of two to three days and, as a result, are unlikely to see significant currency swings, although there is a risk of this. *Unlike a spread betting firm which makes its money from charging a wider bid-offer spread than is available on the markets, a CFD firm charges a percentage commission on each trade (ranging from 0.1 per cent to 0.5 per cent on each trade). *CFDs attract financing charges. A Long position carried over to the following day will attract an Interest charge debited to your account; a Short Position will attract Interest credited to your account. Interest is calculated on the total value of your position. *The Interest rate will vary from provider to provider but as a rough guide it will be the official overnight Cash interest rate plus say 1.5% for Long positions and less 2.5% for Short Positions. So if the overnight rate is 4% you will be charged 5.5% on Long positions and receive 1.5% on your Short positions. Interest is calculated and applied on a daily basis. *(Please Note: Some financial spreadbetting companies offer a 'Rolling Cash Bet' which operates a similar system, however the majority automatically close out Daily positions. Longer-term bets e.g. Quarterly, have the spread adjusted to reflect interest charges. Interest charges are often referred to as Cost of Carriage. The costs of financing a CFD position, as well as commission, are not wrapped into the spread, but are charged separately. Because of this, the CFD spread quote will always be very close to the underlying price of the share or commodity you are following. So you could say CFD prices are more transparent than those for spread betting. It's easier to see where the CFD price is coming from. *CFDs are more flexible than spread bets, which often have set expiry dates, whereas you can let your CFD to run and run. CFD's allow the owner of a Share CFD to partake in Corporate Actions e.g. Share splits, Dividends. *The owner of a Long share or Index CFD will receive dividends in much the same way as an actual shareholder but Short CFD Share and Index positions will have the dividend deducted from their accounts. (Each provider treats Dividend slightly differently so please do check.) CFDs attract capital gains tax (CGT) if you make a profit. This is because in the UK (as in most other countries), traders must pay Capital Gains Tax on their profits from CFDs for which spread bets are exempt but CFDs have the advantage that losses can be offset against capital gains from other investments. Spreadbets cannot create losses for tax reasons (which reduce future gains and therefore CGT) whereas CFDs do. This makes CFDs more appropriate for hedging than spread bets since you can write off losses on CFD positions against gains elsewhere for tax purposes, just as you can with losses on the assets you're hedging. But you cannot write off losses incurred via spread bets. *CFDs usually also allow for bigger positions and minimum contract sizes are also usually larger for CFDs, making them more appropriate to professional investors. CFDs are used more frequently to build up investment portfolios, so they are ideal for anticipating merger and takeover deals. *CFDs are also held for longer periods. This is even more so now that global central bank interest rates have fallen (as the cost of financing contracts for difference is correlated to Libor), this means that the cost of servicing longer CFDs has also fallen. Spreadbetters on the other hand often get in and out within a trading day. *You can open an advisory account with a CFD trading provider which allows your broker to give you recommendations on what to buy and sell. No such thing exists with spread betting - all providers are execution-only. source: http://www.contracts-for-difference.com/compare/cfds-vs-spread-betting.html
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