Share dealing has long been considered the default option for trading and investing private capital, with the image of traders self-managing their assets through a broker familiar to even non-trading folks. With the new era of web technologies and the liberalisation of the markets, share dealing has come under increasing pressure from newer, seemingly more innovative investment types that deflect attention from share trading directly with the promise of better returns on the same transactions. While share dealing will naturally always have a place in financial trading and finance in general, instruments like contracts for difference and spread betting are making traders think again about the way they trade the markets.

What Is Leverage?

Leverage is a form of short-term credit extended to traders in order to enable them to invest more aggressively in the markets. Leverage is most commonly associated with derivatives trading, but some brokers are prepared to extend credit to some trading clients. Leverage has the effect of inflating transaction sizes without tying up any more of the trader’s capital, effective increasing both the returns and risk potential of share investment. When markets move 1%, the effect on the capital growth of a leveraged investment is much greater, because the position profits from the 1% rise on an inflated transaction size. As a result, some traders use leverage to maximize the returns from the positions they trade, despite the financing costs associated with funding leveraged positions.

What Are The Advantages Of Leverage?

Trading shares through leveraged finance is becoming increasingly popular, and even those that don’t have access to broker leverage are switching to derivatives and alternative to direct share investment.

The main advantage of trading shares through leverage is that transactions can be inflated in order to deliver greater returns over a shorter period of time. When traders invest in positions that are highly leveraged, they are effectively hitting the accelerator by accentuating every movement of the market. This makes it possible to earn a far greater return on investment over a shorter period of time, thanks to the leveraged portion. However, leveraged trading is inherently risky, and there are pitfalls which can cause complications for traders relying on leverage as part of their trading strategy.

Why Spread Betting Is A Threat?

People trade shares to generate a return on their capital. But shares are often a cumbersome way to achieve that end. Share transactions are often expensive, with substantial broker commissions, and the barriers to entry are often substantial (depending on the market price of the shares you are purchasing). They tend to be inflexible, in that shares trades can only go long, and any gains are chargeable to both stamp duty and capital gains tax. Taken in the round, it’s no surprise that spread betting continues to pose a threat to share trading as it vies for the attention of new traders.

Spread betting is highly leveraged in comparison to share dealing, meaning traders can theoretically earn more on the same transaction than shareholders in the same position. Spread betting profits are tax free, and the trades are free from stamp duty because no shares actually change hands. Similarly, spread betting is much more flexible, and the spreads tend to be competitive across the industry, depending on the broker you choose to trade with.

This makes financial spread betting a much leaner and more advantageous way to trade than share dealing, at least for those interested in yielding a shorter term return on their investment. While spread betting is naturally comparatively more risky than share dealing, it is nevertheless proving increasingly attractive for traders self-managing their capital.

The Rise of CFDs

Proponents of share dealing should also see the rise of contracts for difference as a major shift in emphasis in financial markets. More transparent disclosure requirements across the investment industry revealed the true extent of CFDs in professional trading portfolios and funds, which now account for a substantial portion of all transactions.

Contracts for difference are preferred by institutional investors to spread betting because of the ownership and legal distinctions, but generally the two function in a similar way. CFDs are more lucrative (although more risky), more flexible and more tax-efficient. In fact, CFDs have become so popular that they seem to have reached critical mass in financial media, with floods of new CFD traders getting involved in financial markets for the first time, for these very reasons.

To suggest share dealing has had its day would be to fundamentally misunderstand financial trading. Many transactions still depend on underlying share markets and others buying and selling equity, and without the ability to raise capital from the markets both companies and governments would be unable to function. But as far as spread betting and CFDs are concerned, the advantages of these trading instruments make them significant growth areas in financial trading.