First of all, it’s essential to understand what a CFD is. A CFD, or contract for difference, is an agreement between two parties (an investor and broker) on whether or not the price of an underlying asset will go up or down. The two parties agree on which assets they want to trade with (stocks, commodities, currencies and more) and how much money is invested per pip movement in the chosen assets’ prices.
Trading CFDs in the UK is legal, though there are some things you should take into consideration before deciding to trade with them. Have a look at Saxo capital markets if you want to trade with CFDs.
How Does CFD Trading in the UK Work?
So, if a trader thinks the price of gold will drop, they may open a short position on a CFD. If the price of gold goes as expected, the trader will close their CFD position and make a profit. CFDs are different from most derivatives in that they do not have an expiration date, so you have the option to exit your position at any time.
It’s because the underlying asset is never owned by the trader that CFDs are considered derivatives. The worth of the instrument is determined by the asset on which it is founded. Several CFD trading platforms in the UK allow you to trade a wide range of assets. The GBP, commodities, indices, British equities and shares are all tradable.
The Advantages of CFD Trading in the UK
Hedging
It’s a risk-management technique in which you open a position in another market, usually with the opposing point of view, to protect yourself if the market swings against you.
Shorting
CFDs are financial derivatives that enable investors to profit from a decline in the price of an asset.
Leverage
In the UK, CFD trading may be leveraged, allowing traders to establish more excellent positions than the spot market would allow. If the trade is successful, this might result in increased earnings.
UK CFD Trading Risks
High-Risk Activity
The Financial Conduct Authority (FCA) is the financial regulatory agency in the UK that licenses trading platforms and requires them to establish a warning on their website to notify consumers of the risk involved in trading.
Taxes
The use of CFDs might result in capital gains since they are a financial instrument sold to generate earnings.
Restrictions on Certain Assets
In the UK, all derivatives on cryptocurrencies are prohibited. The FCA mandated this limitation to safeguard retail traders from the unpredictability of the underlying asset. Spot cryptocurrency, on the other hand, is fortunately still available.
UK CFD Trading Regulations
The Financial Conduct Authority (FCA) is the regulatory body for CFD trading in the UK. The FCA has rules in place to protect retail traders. There are restrictions on the amount of leverage that may be used, depending on the asset and volatility. There’s a maximum of 1:30 for any given currency pair. Stocks and shares are generally traded at a ratio of 1:5, but this may vary.
Regulations also require negative balance protection. The profits from trade are multiplied when it is conducted on leverage. Keep in mind that you may lose more than the deposit amount. If an asset’s price moves significantly, traders are given a margin call to ensure that they do not suffer losses. After a position is opened, the trader must demonstrate that they have the financial means to sustain it by adding more money to their account. Once the account has been verified, it will only be able to close existing positions, not create new ones.
UK Taxation on CFD Trading
Taxation of CFD trading in the United Kingdom has specific ramifications to consider. Traders must submit their earnings to HMRC contrasting to paying taxes through employment, withheld via PAYE. Capital gains, rather than income tax, are associated with CFD profits since they represent the sale of an asset.
You’ll pay 20% tax if you’re a higher-rate taxpayer. If you don’t have another source of revenue, your allowance or any other tax relief you’re entitled to may reduce this.
If you’re not sure how to handle your taxes, you should seek professional assistance from a specialist.
