Playing the stock market can be an exciting way to invest and increase your money, but, rather like gambling, it is also possible to lose your money. Ensure you know the risks of any investment opportunity that you might be considering and make sure that you can afford to lose your deposit if you decide to take a chance on a high-risk/ high-reward investment.
Ways to invest include CFDs and Spread-betting: here is how to understand the differences and choose the best option for your needs:
CFDs (Contracts For Difference)
These are a common way to monitor the fluctuations in the market. With a CFD, you put down a deposit sum, and decide which way you feel an asset with trade in value, up or down. Choosing to back an asset to increase in value is known as ‘buying’ or ‘going long’, while choosing to back an asset to decrease is called ‘selling’ or ‘going short’. Always bear in mind that CFDs are leveraged products, which means that if you ‘lose’ or predict wrongly, you may lose more than your deposit. Also bear in mind that any gains from CFDs may be subject to Capital Gains Tax although it is free of stamp duty as you do not own the asset in question. The way to ascertain if you have made a profit of not is to note your entry price and your exit price, multiplying the difference between the two by the number of CFDs that you hold. Do be sure to note whether the trade has gone with your prediction or against it! One advantage of CFDs is that losses can be offset against profits for tax purposes.
Spread betting is fairly similar to CFDs in that it follows fluctuations in the market. Once again, your deposit is put down and, again like with CFDs, the product is leveraged so that you can lose more than your deposit should your predictions not pay off. Once again, you are predicting whether the value of a particular asset will rise or fall, pinning your profit on guessing correctly. The profit and loss is also similar to CFDs with the entry price and exit price being monitored and the difference between the two being multiplied by the deposit (or stake) that you have put down. One major difference is that spread betting is exempt from both stamp duty AND Capital Gains Tax, so all the profit, less the commission charged by your broker, is yours. Spread betting is only available in the United Kingdom and Ireland. With spread betting you can deal in the currency of your choice.
Spread betting is not liable for Capital Gains Tax, while CFDs are. Spread betting is generally only available in the United Kingdom and Ireland from providers such as CMC Markets or city index, leaving CFDs the best option for those living outside of those areas. Spread betting allows the choice of currency used, while CFDs losses can be applied against other profits for tax purposes. Both offer risk to unwary investors and both offer gains on either increasing or decreasing values as long as the prediction is accurate. In both cases, it is possible to lose your deposit, and more money besides. However, to summarize, both spread betting and CFDs offer a way to make money from the rise and fall of assets on the stock market.