Brendan Burgess
Founder
- Messages
- 52,167
CFDs – Contracts for Difference
In summary, a CFD is a way to borrow money to invest in equities. With an investment of €2,000 you can buy €10,000 worth of, say, Bank of Ireland shares. You will be charged interest on your borrowings. You will receive dividends on your shares.
If the share price drops by 10%, you will lose €1,000 or 50% of your investment. If the share price rises by 10%, you will make 50% of your investment.
Should you borrow to invest in shares?
This really is the fundamental question. Borrowing to invest in shares is extremely risky. You can lose your entire investment. Shares are volatile and frequently fall by 10% or more. Most conservative investors have a portfolio of shares held for the long term, with little or no borrowing.
CFDs tend to be used by people who want to take a short term punt. They expect a short term jump in the price of a share, so they buy a CFD.
If you decide to borrow to invest in shares, a CFD is better than borrowing externally. There is no stamp duty. And the interest can be set off against the gains for CGT purposes. However, it might be cheaper to borrow externally.
The cost of CFDs
You will be charged the normal commission on the purchase of the shares.
You will be charged interest on the borrowing involved
You will not be charged stamp duty
The hidden costs of CFDs
Some(most?) of the issuers of CFDs are market makers, so there is a difference between the price at which they buy and sell the shares. This is usually quite a tight spread, but some are looser. If you are buying and selling over a short period, this is an additional cost to be overcome.
The tax treatment of CFDs in Ireland
CFDs are treated like any other assets and gains and losses will be subject to CGT.
They are attractive because the interest paid on the borrowings can be deducted from any gain.
There is no Stamp Duty on CFDs which makes them suitable for short term investors.
What happens the dividend income? Presumably it comes into the CGT calculation?
Are they suitable for long term buy and hold investors?
CFDs are useful if you think a share price is too high.
The examples above assume an investment where you expect the share price to rise. However, if you expect a share price to fall, you can also use CFDs to profit from the fall. This is highly speculative. Even when you feel convinced that a share price is too high, it often keeps rising.
Useful links
[broken link removed]
[broken link removed]
In summary, a CFD is a way to borrow money to invest in equities. With an investment of €2,000 you can buy €10,000 worth of, say, Bank of Ireland shares. You will be charged interest on your borrowings. You will receive dividends on your shares.
If the share price drops by 10%, you will lose €1,000 or 50% of your investment. If the share price rises by 10%, you will make 50% of your investment.
Should you borrow to invest in shares?
This really is the fundamental question. Borrowing to invest in shares is extremely risky. You can lose your entire investment. Shares are volatile and frequently fall by 10% or more. Most conservative investors have a portfolio of shares held for the long term, with little or no borrowing.
CFDs tend to be used by people who want to take a short term punt. They expect a short term jump in the price of a share, so they buy a CFD.
If you decide to borrow to invest in shares, a CFD is better than borrowing externally. There is no stamp duty. And the interest can be set off against the gains for CGT purposes. However, it might be cheaper to borrow externally.
The cost of CFDs
You will be charged the normal commission on the purchase of the shares.
You will be charged interest on the borrowing involved
You will not be charged stamp duty
The hidden costs of CFDs
Some(most?) of the issuers of CFDs are market makers, so there is a difference between the price at which they buy and sell the shares. This is usually quite a tight spread, but some are looser. If you are buying and selling over a short period, this is an additional cost to be overcome.
The tax treatment of CFDs in Ireland
CFDs are treated like any other assets and gains and losses will be subject to CGT.
They are attractive because the interest paid on the borrowings can be deducted from any gain.
There is no Stamp Duty on CFDs which makes them suitable for short term investors.
What happens the dividend income? Presumably it comes into the CGT calculation?
Are they suitable for long term buy and hold investors?
CFDs are useful if you think a share price is too high.
The examples above assume an investment where you expect the share price to rise. However, if you expect a share price to fall, you can also use CFDs to profit from the fall. This is highly speculative. Even when you feel convinced that a share price is too high, it often keeps rising.
Useful links
[broken link removed]
[broken link removed]