When you trade CFDs, you’re entering into a contract for difference (CFD), which is an agreement to exchange the difference between the opening and closing price of your position.
CFDs are advantageous if you’re a trader with a short-term outlook. This is because CFD trades enable you to speculate on the price of an asset by going long (buying) or going short (selling).
One of the main benefits of CFD trading is the ability to use leverage, giving you full market exposure while only having to commit a deposit to open your position(known as a margin). So, if you wanted to open a £100 CFD trade on HSBC shares, you’d put down a margin (often 20%) to trade the movement of HSBC’s share price – an initial sum of £20.
But, trading with leverage carries risk. While it can amplify your profits, it can also magnify your losses. That’s because any profit or loss is calculated using the full size of the position, rather than your margin amount. So, with our HSBC example, your profit or loss would be calculated on the full £100, not your £20 margin. Learn how to manage your risk.
Generally, CFD trades in the UK are also free from stamp duty, but you’ll pay capital gains tax on any profits. They’re also great for hedging a non-leveraged investment portfolio, as any losses can be offset against profits for tax purposes.1 Remember that tax law may differ in a jurisdiction other than the UK. These laws are subject to change and depend on individual circ*mstances. If you’re new to the concept of hedges, learn more about hedging in our guide.
If CFD trading isn’t for you, we also offer spread bets, which enable you to trade tax-free.1 Just like CFDs, spread bets let you speculate on the direction of an asset’s price movements rising or falling, and your profit or loss is determined by the accuracy of your prediction and the size of the market movement. Learn more about the differences between spread bets and CFDs.
