If you compare CFD trading and Spread betting – you will first notice the advantage of spread betting which is the not required payment of Capital Gains Tax. But aside from this, there are a lot of problems with spread betting. This article will tackle the most common problems encountered on spread betting and CFDs.
Spread. Because of the spread, this type of trading is not recommended to be used by day traders. You also don’t get the chance to trade inside the spread, something that you can get when you trade with CFDs and equities.
Sticking Closing. The opening of a position in spread betting is quite easy. The problem can arise during the closing of a position. A trader cannot easily close the trading position, which causes trouble. You will see that you are re-quoted from time to time. This is the way of a spread betting company to wait for the financial market to go in its favor. For instance, you close a position and it has “gone off to be processed”, you start the waiting game only to be surprised that the deal was closed at the worst possible price.
Losses. You can experience sudden huge losses that can span without limit. This is because, there is no such thing as a stop loss position, just like when you trade CFDs and Forex.
Magnify market moves that increase volatility. Because of the nature of spread-betting, the price movement in the market is very unpredictable. Volatility is also very intense here.
Not for long-term trading. Spread betting, unfortunately, is not for holding long-term trading positions. It is better off as a gamble rather than a viable long-term investment option.
No rights and dividends. Another disadvantage of spread betting is those that trade on shares. They are not given any rights to dividends or other similar rights as a company shareholder.
Price re-quotes are possible.
Leverage can be deadly if not handled properly. It works like a double-edged sword because it magnifies losses as it magnifies gains.
CFDs are also riskier compared to trading shares. Despite not being required to deposit the whole amount for the asset’s value, if the market goes against you, you will lose your deposit alongside your trading funds. In short, your trading account will be wiped out. Short-term traders also get exposed to significantly high losses.
Overtrading is very common in CFD. This is due to the fact the traders get easy access and require low capital to open a trading account.
Overnight financing. If you want to hold your positions overnight because you expect it to become more profitable the next day or you are aiming to cover your losses, then you will risk paying for overnight fees. This fee will be based on the contract size. Additionally, long trades are subject to an increase in interest payments.
In CFD trading, the trader does not have the right to the company shares that he bought. This is because you don’t really own the underlying asset in CFD.