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As both spread betting and CFDs (Contracts for Difference) are derivative trading products, it can be difficult to differentiate between the two and make a selection regarding the right one for your needs. When trading with leverage, making the right decision could be the difference between making a profit or experiencing a loss, so let’s take a look at the key aspects of each.
Spread betting and CFD trading
Firstly, a financial derivative is a trading product that allows individuals to enter market positions without taking ownership of any assets. Those using spread betting or CFDs instead speculate on the price movements that occur during trading sessions. As they both fall under the same product category, they share the same benefits, but there are some differences that can be taken advantage of by the right traders.
The similarities
Both of these trading endeavours are leveraged by funds provided by brokerages. This means that individuals only need to put forward a margin amount (a small percentage of the overall position’s cost) to get involved. They share the ability to go short or long on trades, meaning that profits can be earned if the asset’s price falls and losses experienced if it rises. This effectively doubles the opportunities on offer (which is more than many other types of trading can cater to).
Each has access to thousands of financial markets on a single broker account, including Forex, indices, stocks, commodities and more (the exact number will likely vary from platform to platform, however). This means that they can bring a level of diversification to your trading portfolio without having to learn new skills or implement a host of trading strategies.
The differences
The biggest difference between these trading types is how they are taxed. Spread betting (unlike many other forms of trading) isn’t subject to capital gains tax on profits and any money made from CFD trading can be offset against any losses.
It was mentioned above that traders will have the to ability to open both short and long positions with spread betting and CFDs, but there are differences in the way that these function. For example, spread betting is undertaken with an amount of money set per movement in the price points of the underlying asset, whereas CFD trading works by exchanging the differences in price between the opening and closing of positions.
The way in which premiums are charged varies also. In spread betting, charges are built into the overall price of the positions taken, so it can be simpler to track the money earned and lost as you trade. The broker makes their profit after charging a bid-offer spread. With CFDs however, brokerages will often require commissions of a fixed percentage on each trade.
In general, spread betting is often considered to be a transaction that occurs outside of the market and many individuals see it as a form of gambling. As CFDs are contracts, they are often deemed to be transactions within the market.
For further more information on spread betting and CFDs visit this page.
Why choose spread betting?
Here is a quick breakdown of the pros of spread betting:
- Tax-free profits
- Easily control deal sizes
- No minimum commissions or restrictions on trade sizes
- Trade across international markets in the currency of your choice
Why choose CFDs?
Here is a quick breakdown of the pros of CFD trading:
- Use direct market access (DMA) when trading shares
- Offset losses against profits on your taxes
- Lower spreads and trading costs
- No expiration date
Both forms of trading are regulated in the UK by the FCA. Click here to find out more.
Which is the better option?
In general, the answer to this question can only be answered by defining your own trading style, goals and budget. There is a big downside to keep in mind when using either however, and this is that leveraging can magnify losses – these are taken across the whole spread and not just on the margin you contribute. This means that you may not expect the financial hit you’re about to take and that losses can quickly add up without the right risk management strategies in place. It’s essential to utilize demo accounts as well as stop losses to protect yourself from large losses.
Having said this, both derivatives have advantages that attract traders of all skill levels and with varying experience, so the final decision is often made based upon personal preferences.
Disclaimer:
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
