Why hedgers should look at CFDs

Much as we like spread bets, contracts for difference (CFDs) undoubtedly have their uses, and hedging is one of them. Tim Bennett explains.

When it comes to taking a punt on the direction of shares, both spread bets and contracts for difference(CFDs) are possible choices. Both allow you to place up ('long') and down ('short') bets, both are liquid (so opening and closing a position is straightforward), both are margined (so you get lots of bang for your buck) and both are offered by a number of firms so costs are generally low. However, when it comes to hedging, CFDs have one big edge tax.

At first glance, this might seem odd. Surely spread bets are better since they don't attract capital gains tax? Well, for a gambler that's a big plus for sure. Why hand over 18% or 28% of your profits (depending on what rate of tax you pay for income tax purposes) if you don't need to? However, for a hedger someone seeking to protect, say, shares against a price fall the tax treatment of CFDs can be a winner.

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.