Would it be easier for me to stick with what I know and trade shares?
Sticking to what you know is never a bad idea. Some traders first start with regular shares and then move into other areas like spread bets/CFDs/forex trading. I find spread bets/CFDs particularly convenient for swing trading as I don’t have to pay stamp duty on deals and its very easy to dip in and out.
How does spread trading and CFDs differ from investing in shares?
It differs in many ways.
Advantages of Spread Betting and CFDs include:
- You can profit from falling share prices as well as rising prices.
- It’s free to open an account and you get free, easy-to-use charts on thousands of markets.
- You pay a relatively modest “spread” on each trade compared with typically more costly broker commissions.
- There is no stamp duty for both trading mediums and for UK residents no capital gains tax applies to profits from spreadbetting.
- Trades are executed immediately and you can set your own trade entry and exit levels.
- Tools to limit your risk are at your fingertips including stop loss orders and decimal trading i.e. very small stakes.
- It requires a much smaller outlay (typically 10-15%) to make the same profit as would be derived from buying shares.
- You can protect or hedge an existing investment with a spread or CFD trade.
- There is no currency risk when trading in overseas shares denominated in other currencies.
- In addition to shares, you can trade indices, currencies and commodities.
- You can do all your trading online or by phone and your funds are highly liquid.
To be balanced, buying shares would offer some advantages:
- Investors have voting rights
- You receive 100% of dividends (you also get dividends with spread betting or CFD trading but typically it’s 80% not 100%)
- You have the choice of receiving advice from your broker. Spread Betting / CFD providers is execution only
Note: It is safer dealing in markets which are liquid (i.e. heavily traded). One danger in dealing in illiquid shares is that you might be unable to exit your position in certain situations. Let’s say you are long in a small cap and the market moves sharply against you. You want to exit your bet to curtail your losses but if everyone else is trying to exit, you may find that it’s very difficult to exit as the stock price keeps moving down.