UK CFD Rules Changing

Posted by Rob

October 24, 2008

Since the early 1990’s Contracts for Difference have been used extensively by investors enabling them to use leverage to profit from the difference in buy and sell prices of stocks.

CFD’s have been particularly popular in the UK as they are exempt from stamp duty for UK traded shares.

According to the Financial Times, CFD’s have been blamed for market volatility.

Although CFD investors can convert their contracts into stocks, there are no voting rights with CFD’s. The Financial Services Authority - which has received a lot of negative press for allowing banks to engage in risky investments - announced new measures to control CFD trades. Investors will have to disclose holdings in stocks when this breaks the three percent threshold.

At present investors can build up large stakes in businesses with CFD’s and convert them to actual stock with little warning.

Although exact details are still to be decided, final rules will be issued in February 2009.

According to Peter Montagnon, director of investment affairs at the Association of British Insurers, “companies should know who has built up a stake and investors too should be aware of what would otherwise be happening behind their backs.”

An alternative to trading CFD’s - which can be complex for the beginner - is to consider trading currencies in the foreign exchange market. Although there is likely tax implications when trading Forex, it offers a high level of liquidity. Even in volatile situations, such as the recent global credit crisis, currency trading can be an effective leveraged tool that limits exposure to the market, but can offer profits as part of a balanced investment portfolio. There are a variety of FX trading solutions available for corporations, as well as an opportunity for retail investors to dabble in the currency market, by opening a margin trading account with one of the large Forex merchants.

When considering which Forex merchant to deposit your funds, it is vitally important to choose well. There are also legal compensation factors to consider. This can vary depending on which country the trader is based. In the US, the U.S. Commodity Futures Trading Commission offers information on fraud proceedings against institutions, so a quick search can reveal information many financial companies offering FX trade processing and other derivate trading solutions.

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