CFDs (Contracts for Difference) and spread betting have gained in popularity over the last few years. From small beginnings in the 1990s, these business activities continue to take market share from the more traditional methods of share investing.
They are not for everyone however, and a key part of our role at Patronus is to assess whether or not derivatives are suitable for you. Your Broker will take time to understand your situation and to make sure you fully understand how derivatives work and what is involved in derivatives trading, before deciding if these products should have a place in your investment portfolio.
So why do we think that the derivatives market has gained momentum? Well, from an investor’s point of view, the lower charges, tax savings and lack of stamp duty (saving 0.5% duty) may go some way to explaining it. Tax free profits from spread betting may be a factor too.* Derivatives also allow you, as an investor, to utilise leverage (allowing you to lodge just part of the overall cost of your investment) which may also add to the perceived appeal of these products.
However, it is not all plain sailing. When considering if derivatives are potentially for you, you must also listen to the other side of the story. Firstly, leverage heightens risk, which could potentially exaggerate losses as well as profits. This might mean that you could stand to lose more than the original stake you were asked to lay down. You must understand and be prepared to take this risk if you want to use derivatives as part of your investment strategy.
There are other considerations you must bear in mind too. Each company that provides derivatives services, charges in different ways. And it’s not always easy to determine which the cheapest operator is. Headline commission rates grab attention, and you won’t have to look very hard for commission-free dealing. However, be aware that they are earning their money somehow. At Patronus we can help you to navigate through this industry. Our advice extends to understanding the variety of business models in the sector, and selecting the right platform for you.
We only provide advice on CFDs and /or spread betting to those considered to be professional clients under FCA rules.
*The tax situation here is applicable to UK residents only. This information is based on our understanding of current legislation which may change at any future date. In addition, the tax treatment of any instrument may differ from client to client. Clients should seek professional tax advice if they are unclear as to the tax status of any of their investments or investing styles with us. This particularly applies to the tax status of spread betting.
If you require advice, or would like to talk to a Broker to discuss what Patronus can do for you, please contact us.