The practice of CFDS trading is increasing in popularity and it has been likened in many ways to spread betting. While it is certainly true that there are similarities between both markets, there are clear differences that you need to weigh up when deciding which course of action to take.
The acronym CFDS stands for Contract for Difference and it essentially means that a deal is drawn up between two parties – a buyer and a seller and it states that the buyer will pay to the seller the financial difference on an asset at the time the trade is carried out and the time that the said asset goes to contract.
If there is a negative difference then the buyer will pay the seller and therefore if you are the buyer in CFDS trading, you are speculating on a loss which will in turn reward you with a profit further down the line.
This therefore allows you to speculate on financial areas such as shares but you don’t have to own a certificate. Another benefit is that the contract is settled at a definite date and there is no need to sit on shares while deciding when you need to sell them on.
The comparison with spread betting is largely found in the financial benefits that lie with CFDS trading and unlike share capital, there is no capital gains tax to pay on any money that you gain through these transactions. However, unlike spread betting, a contract for difference allows you to book losses against any future capital gains tax and this is one of the reasons why many of those who gamble on the markets will turn to CFDS.
Another main difference between the two practices lies in the currencies involved. If, for example, you were using financial spread betting to speculate on the Japanese stock market then the transaction would typically be carried out in pounds sterling, US dollars or Euros depending on the location of your bookmaker or trader.
However, if you were trading on a CFD where the asset originates from Japan or anywhere else in the world, the contract would typically be signed in the local currency.
These slight differences are worth bearing in mind but the main message for anyone looking to get into financial spread betting or CFDS trading is to do your homework before parting with any money. If you already work in the financial sector then you will doubtless have an advantage over others but if this doesn’t apply to you there are ways in which you can carry out some research.
Search for as much material online as you possibly can and make sure you fully understand how CFDS work before you begin. Maybe you could even carry out some ‘dummy’ bets before entering the market for real.
CFDS trading can be extremely lucrative but on occasions your exposure can be high. To reduce risk, absorb all the information you can and while there are no guarantees, it is perfectly possible to turn this form of trading into a lucrative side line.