In United Kingdom, the Financial Services Authority is the one regulating and monitoring the world of contracts for difference (CFDs). Aside from that, there are various European Union directives pertaining to this transaction. Most of those directives seek to make the trading field smooth all throughout the entire region. It is in this light that traders and investors need to comply with the policies of the FSA so that they can continue to trade without hindrance or discontinuance. The FSA is also the one that is regulating the brokers working on this field. Hence, investors who are hiring brokers need to make sure that the one they got is an authorized or regulated one.
With the foregoing, the other regulations surrounding the CFD trading touch other aspects too. Some of these include the taxation, pricing or costs and even assets that investors can trade.
Taxation: Gambling versus Investment
On the one hand, the taxation treatment for this is primarily dependent whether the law considered it as a gambling or a form of investment. In UK, it is not equivocally a form of gambling. Well, this is because gambling is about fortune and chance. However, CFD trading does not solely rely on pure chances and luck. This is also because there are measurable factors that traders can research and interpret in order to get over the risk and earn profits.
In this regard, the government of UK taxes the income of a trader from this transaction. In some countries, this is not taxable at all since some governments treat this as a form of gambling rather than an investment. In terms of the taxation, it is, in fact, liable to capital gains when the trader gains more than the annual exemption level of £10,000. However, this is not liable for a stamp duty unlike in share transactions.
Pricing and Costs of CFDs
Like most of the financial instruments, the pricing of CFDs is primarily dependent on the market rate, in addition to the weighted factor. The broker includes the said factor in order to have a more accurate impression of where the market is most likely headed. In terms of the costs, CFD trading is more cost efficient. This is because it consists of only the commission of the broker and the financing cost.
Assets for Trading
Investments can engage into CFD trading with a wide range of assets, markets as well as instruments. For instance, traders can participate in a transaction in FTSE 1000 shares or even on index. Aside from that, other popular fields where investors can trade on CFDs include different commodities like rice, pork, livestock as well as precious metals. Further, this can also be traded on currents, bonds and interest rates.
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