Short Selling | Which Is The Better Instrument To Short Sell Shares - Spreadbets Or CFDs?

3rd Jun '16 by cafcash49

5 comments 14638 reads

For a little while I have been considering Shorting and going long on shares. I am a regular investor and have a reasonable sized portfolio consisting of a Marketmaster, an ISA and a SIPP. I do OK with the help of Stockopedia. Now I want to try a bit of shorting and going long with some equities - getting adventurous :-)

I have just been approached by Galvan who are trying to persuade me to do CFD's with them. Previously I was considering Spread Betting with IG. Now I have options I am beginning to wonder which is best for me. The differences seem quite small and subtle but with Spread Betting I don't have to consider tax so that is less record keeping I guess.

As there is so much expertise out there I will be interested in the views of others. Hope you can help and educate me.

Charles

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Edward Croft

3rd Jun '16

I can only speak from my own experience and this is not financial advice - DYOR always. Over the last year I have short sold around 40 stocks on a consistent basis using spread-bets on IG. I am yet to do a full attribution analysis of the contribution of the shorts to the overall performance but here are a few of my personal findings:

IG make it very easy to short sell - it's just the inverse of buying and you can execute in a few seconds.
You have to make sure you calculate your exposure correctly. As this is a spread bet it's easy to take on too much leverage accidentally. In spread bets you deal in "pounds per point". If you sell £10 per point of Berkeley Group at 3239p you are short £32,390 in market exposure. If you sell £10 per point of Laura Ashley at 24p you are only short £240. This makes a big difference!
It's very hard to short shares that have a market capitalisation under £1bn. I pretty much gave up... there's a lot of trial and error through the web interface in getting shorts to 'stick'. Phone dealing may be more productive - but I'm always in a hurry. I know that Paul Scott shorts shares often by borrowing stock via his broker - this lets him short small caps... you need a good broker to short small caps. Personally I'm fine with shorting larger caps as the shorts are primarily a hedge to my smaller cap sector longs. You can see the shares that are available to short on IG on this PDF.
You have to put down margin. Spread betting is naturally geared - so you only have to put a fraction of capital down for the short. While you may have an underlying exposure of £32k for shorting the BKG example above, you may only have to put down £1.6k of margin as there's only a 5% margin ratio on this stock. So if the stock fell 10% you'd double your money. Of course it's nuts to take all the margin they offer as IG and others count on the fact that lots of people over-lever and go broke! Small caps will have higher margin requirements - which can be anything up to 50%. Check margin requirements on this PDF. Learn more on margin here. You must watch out for margin calls. In volatile markets IG can ramp up their margin requirements - I think the margin on PLUS went up to 75% at one point. I don't use all available margin, but keep substantial equity in my account. Always calculate your underlying exposure... !
Often you can only short the DFB. Spread bets have maturities - i.e. you have to pick a quarter when the bet matures. I normally choose a quarter end at least 6 to 9 months away... it's more expensive but I don't want to trade much short term. If your trade matures and you want to keep it on you'll have to pay the rollover spread cost. Often when shorting you can't actually trade the fixed maturity bets and you have to use the DFB - daily funded bet. This is basically an instrument that permanently rolls over without a maturity. I found the costs pretty comparable with the fixed maturity bets but I haven't done an extensive analysis.
You are liable for dividends. If you are short you have to pay the dividends ! This comes out as a debit adjustment on your account so can be a shock when short. Most low StockRank shares don't pay dividends so this has been a negligible issue for me to date.
There's no commission but there is a wider spread. Generally the spreads I find ok on IG as they are the market leader.
Mind the borrow charges and funding adjustments. LIBOR rates are low at the moment and there's a funding requirement that is LIBOR minus 2.5%. This basically means that you have to pay on an ongoing basis to short. I've not found this an issue, but I also haven't calculated the exact amount of interest I'm paying. Luckily for me I've had a very good 12 months long/short so the funding issues have been negligible. In leaner times though this could be an issue - read up on the details here.

IG have a great section on their website about shorting - you should read up on it here http://www.ig.com/uk/short-selling-articles - they also explain quite well the difference between shorting by borrowing stock, CFDs or spreadbets.

That's all I've got off the top of my head on a Friday - I'm sure I've missed something or made a glaring mistake, but that's about the sum of it.

cig

5th Jun '16

Spreadbets and CFDs are essentially the same thing with a different tax treatment, so what matters economically are the conditions of the particular product. On the tax front, spread bet profits are tax free but you can't write off losses against other gains, so it's swings and roundabouts, other than less admin (if you've used up ISA and SIPP allowances).

If a broker approached you, it's probably because they want to sell you a high fee product. From a quick google this one seems to be a churn shop.

mpat89

I would argue there is one other difference:

With some CFD brokers you trade directly in the market rather than being forced to accept spreads engineered by the brokers. Given the annual exemption for capital gains and the reduction in the tax rate to 10% beyond this exemption, I think CFD's are definitely worth considering over spread betting for the direct market access alone.

I thought the brokers who do DMA CFDs would have equivalent DMA spread bet products. Seems rarer than I thought for some reason but these guys for instance seem to do it.

cafcash49

8th Jun '16

Thank you Ed, cig and mpat89 for taking the time to respond. I am still considering but have opened a dummy account with IG to get familiar with Spread Betting.

Which is the better instrument to short sell shares - spreadbets or CFDs?

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