Together with the weekly share tip I mentioned the use of CFD’s (and spread betting) in yesterday’s free edition of The Value Investor Report as a means by which private investors could short a main market index when the correction does finally arrive.
Here’s what I said:
To be on the safe side I’ve started to look at ways of shorting the market and have decided on either a straight spread bet short on the S&P 500 or FTSE 100. This is something new investors ought not to get involved in since spread betting and the use of CFD’s means using leverage and if you’re not familiar with leveraged products then it is simply suicide to try and get involved. Shorting the market without using leverage is possible with the use of exchange traded funds (EFT’s).
Indeed I’ve been using leveraged products for years and understand the risks involved.
What Is A CFD?
A Contract For Difference is a way to short or go long on stocks as well as other markets such as indexes or currency pairs.
You may be thinking that it sounds like spread betting which it kind of is because you only put up a fraction of the cost called a deposit to gain much more market exposure.
This where the danger of using leveraged products comes into it’s own because your losses on any position whether long or short are exacerbated because you can lose more that your deposit.
Also because CFD’s use margin you are charged an overnight which means that if you hold a long position for an extended period of time then it may be cheaper to have bought shares in the first place.
I’ve seen one study where the period of time where an investor breaks even on an equity long position is approximately three months.
On short positions you are paid interest.
The main features of a CFD’s are:
- You can go long or short
- They are leveraged (watch out!)
- No stamp duty (UK) except for Irish equities
- CFD’s are offered on equities, currency pairs, indexes and more
- You are charged overnight financing
- You are liable for capital gains tax (UK)
Will you be usng CFD’s or ETF’s to short the market when the correction arrives?
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