What Forms Of Trading Are Available?

The two most commonly used forms of trading in the online financial market today are Contracts for Difference and Spread Betting. Although both seem similar on the surface, the potential profit and loss available from both forms of trading vary greatly.

Contracts for Difference or CFDs, are contracts that are purchased in an asset, and the profit or loss made from a CFD trade is dependent on the price you purchase the contract and the price you sell it. Most commonly used due to the fact that CFDs are not subject to Stamp Duty, is a derivative product meaning you can trade on the margin and they have no expiry date, traders tend to opt for CFDs over other forms of trading because the potential loss you can incur when using CFDs is lower than in other forms of trading.

Below is an example of a common winning CFD trade:

–          Feeling that US Crude will go long in the stock market you purchase 5 contracts of US Crude at £100 a contract.

–          The total price of the investment would be £500. However as the margin is set at 2% for that particular trade, you would only be liable to fund your account £10 in order to execute the trade.

–          The price of US Crude increases by £20 a contract, giving you a rolling profit of £100 (£20 x 5 contracts)

–          Upon closing the trade, providing there has been no change in the above scenario, you end the trade with a profit of £50

Below is an example of a common losing CFD trade:

–          Feeling that US Crude will go long in the stock market you purchase 5 contracts of US Crude at £100 a contract.

–          The total price of the investment would be £500. However as the margin is set at 2% for that particular trade, you would only be liable to fund your account £10 in order to execute the trade.

–          The price of US Crude decreases by £10 a contract, giving you a rolling loss of £50 (£10 x 5 contracts)

–          Upon closing the trade, providing there has been no change in the above scenario, you end the trade with a loss of £50

As you can see from the two above examples, though there is a smaller risk in terms of the potential loss you can incur when CFD trading, the smaller risk of loss also means the potential profit is smaller as well. In order to make larger profits when CFD trading you have to consider risking more money on trades, so the risk is heightened once again.  As mentioned though, CFDs have no expiry date, therefore you can hold on to your trade for as long as you would like until it gains a substantial profit, however as with any form of trading, this is never a guarantee.

Spread betting is arguably the most popular and most commonly used form of online trading in the market today, with some spread betting companies claiming that they open 300 new accounts every month. People choose spread betting over other forms of trading for a number of reasons, most notably that all profits made from spread betting are exempt of capital gains tax, stamp duty and with some companies, commission and fees, effectively eliminating any money being taken from the profits you make trading. As opposed to CFDs, when it comes to spread betting, you do not purchase contracts or shares in an asset, you instead simply bet on the direction you anticipate the asset will move in, this means you can make a profit whether a company goes up, or down, in the market.

As with CFDs, almost all spread betting trades have no expiry date, meaning you can hold your position in a trade for as long as you would like, so if the trade moves against you, you can continue to hold until it moves back in your favour, however this is never a guarantee. Similarly to CFDs, spread betting is a derivative product allowing you to trade on the margin; this means you are only required to fund your account with a percentage of the total amount of the trade. Finally, spread betting has become, arguably, the most popular form of trading because you have the potential to make a bigger return on a smaller investment and there is also a larger market to trade on, meaning you have more of a chance of making a profit if you correctly anticipate which direction the asset will move in.

Below is an example of a winning spread betting trade:

–          You anticipate that BP will go long (up) in the market from 463p to 483p

–          As opposed to purchasing contracts in BP, as you would with CFDs, you instead place £10 a point on BP going long in the market

–          This means that if BP move up from 463p, you make £10 a point for every point it moves

–          BP moves up in the market from 463p to 477p

–          Although it did not reach the price you originally anticipated, the 14 point increase has made you a rolling profit of £140 (14 points x £10 a point)

–          You close the trade at 480p a share, making you a total profit of £170 (17 points x £10 a point)

Below is an example of a losing spread betting trade:

–          You anticipate that BP will go long (up) in the market from 463p to 483p

–          As opposed to purchasing contracts in BP, as you would with CFDs, you instead place £10 a point on BP going long in the market

–          This means that if BP moves up from 463p, you make £10 a point for every point it moves

–          However BP goes short from 463p to 443P

–          This negative movement has resulted in you having a running loss of £200 (20 points x £10 a point)

–          Looking to cap your losses, you end the trade with a total loss of £200 on this trade

As seen in the above example, although spread betting allows traders the opportunity to make a bigger profit than their original investment, this also leaves traders open to big losses if the asset moves against them.

Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment. 

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