Going Long and Shorting with CFDs
There are 2 types of trading with CFDs: going long and shorting.
A trader will open a long CFD position if he wants to buy shares which he expects to rise in value so that he can sell them at a later date and make a profit.
A trader will open a short CFD position if he wants to trade shares which he expects to fall in value so they can be bought at a cheaper price, with the difference between the opening and closing prices being counted as a profit. In this type of transaction, the trader is in effect ‘borrowing’ the shares from a third party to open the bet. So, when the trader finally buys the shares to fill the order at the lower price, the trader will be in profit.
Traders can choose to trade on indices or equity markets, the margins set by the CFD company are often different depending upon which financial instrument is selected.
When opening a CFD position, either long or short, there are a few charges a trader must take into consideration in addition to the initial margin required to start the trade.
CFDs are liable for Capital Gains Tax, charged on the income earned from closed contracts. However this also means that they can benefit from losses as well, by writing the losses off against their gains. CFDs are not charged Stamp Duty, because there are no actual shares being bought or sold. Stamp duty taxes are 0.5% so traders can save substantial amounts of money by avoiding this charge.
