Using CFDs (Contracts for Difference) and Spread Bets

When I first started trading my own portfolio I would buy actually equity positions on the stock market. I found that a lot of my money was tied up owning too little positions plus owning actual shares means you do not have the advantages of other vehicles such as guaranteed stop losses and the ability to leverage to buy a larger positon than you ordinarily would.

Several years ago I started using Contracts for Difference (CFD) and Spread Betting thorough Igmarkets and IgIndex respectively.

So what are the pros and cons of each:

CFD's
Pros - ability to leverage a position using margin (i.e. you can buy £20,000 of a FTSE 100 company for £1000 margin down payment), guaranteed stop losses are available (even if a company goes bust you are guaranteed the stop price, with normal shares you often cannot sell in a steeply declining market), can go short (sell a share with a view it is going down) or long (buy a share with a view it is going up), free from UK stamp duty
Cons - It is a leveraged product so you need to be careful about having enough margin if the price of one your portfolio constituents suddenly moves, you pay interest on the cash value of the positions you own (which can add up over time), guaranteed stops not always available on volatile AIM stocks, you are still subject to capital gains tax (if you go over the annual allowance)

Spread bet
Pros - leveraged like CFD's, not subject to capital gains tax or stamp duty (since technically a bet), guaranteed stops available (though not always on AIM)
Cons- limited time scale (you have to buy a position based on price 1, 3 or 6 months ahead), you pay a premium in the spread (the difference between buy and sell which is increased on guaranteed stops), a large margin can be required especially for small cap shares

I hate it when the markets are closed

I'm waiting for the markets to reopen tomorrow with great anticipation with the news due from Xcite Energy and Bowleven. Even if RNS's aren't forthcoming on Monday, then its only a matter of time.

Things are nicely primed for positive share price action. I took the decision to close some of my CFD (contracts for difference) positions on Friday and open spread bets on IG INDEX instead since this strategy means any large move up in Xcite will mean no capital gains tax liability. CGT is now 28% for higher rate tax payers and I don't fancy handing over a third of my Xcite gains to the Inland Revenue. On September 2011 spread bet positions the premium was pretty reasonable late on in the week for Xcite. Annoying though that the deposit requirements on both Xcite and Bowleven are high given their AIM status.

A lesson I've learnt with both CFD and spread bet trading is to leave plenty of deposit in your account to avoid any problems if things go wrong and they start closing positions for you because of margin calls. Before the 2008 stock market falls, they used to call you to tell you to deposit more funds. Now they just close them without informing you. I can imagine there were a lot Rockhopper investors caught out when the "flash crash" happened last year and there margin was exhausted when the price collapsed only to be in utter dismay when the share price recovered. This is why I do not use stop losses on AIM stocks, the volatility can be so enormous that you can be caught out whilst you're in a meeting or getting a coffee! Juggling things to maximise your position but leaving yourself some security in case things go wrong can be a tricky balance.