fbpx
  • Difference Between Spread Betting vs CFD

    CFDs can be defined as the difference between the entry and exit point of a trade, giving the abbreviation its full name, Contract For Difference. CFDs mean profits (and losses) are actualised when the underlying asset moves in relation to the trader’s position taken, without ever having to own that underlying asset. Therefore, both CFD trading and spread betting are margined products and offer a similar scope for profit from investments in shares, commodities, currencies and indices.

    So between spread betting and CFD, which should you choose? As ever, this decision can ultimately only be made by you, but with the following review of several pros and cons associated with both forms of trading, you should be better placed to make an informed decision.

    Taxes

    Spread betting has amassed popularity with UK residents because its profits are exempt from capital gains tax. When CFD trading on the other hand, traders do not at any point own the underlying asset, so your profits will be subject to capital gains taxation.

    Both forms of trading however are exempt from stamp duty, offering a much-needed respite from the 0.5% duty applicable to share trading.

    Leverage & Margins

    Both spread betting and CFDs are traded on margin, and as a result offer high leverage opportunities to traders. This means that traders need only deposit a small proportion of the overall value of the spread bet and trade in order to open and hold a position.

    CFDs offer huge leverage when compared with traditional trading, beginning with a leverage requirement as low as 2%. (Leverage may change due to trader’s eligibility to become a professional client.)

    It’s always worth bearing in mind that, whilst high leverage is enticing for new and experienced traders alike, profits and losses are magnified by movements in the market. This means that losses can quickly exceed your deposits if you don’t take care in understanding the risks of high leverage, so take some time to have a read around the subject before committing to high-leverage trading.

    Difference between Spread Betting and CFD

    Commission

    Typically speaking, spread betting companies will not charge a commission on your profits because they will make a small amount in the spread offered to you. With CFDs however, a commission will likely be charged to your account alongside the small amount applied to the spread value.

    Choosing What’s Suitable For You:

    Spread betting trading could be what you are looking for if:

    • You’d prefer your trading profits to be tax-free (and are a UK resident)
    • You are happy to deal with fixed expiry dates
    • You don’t want to pay a commission on your profits

    CFD trading could be what you you are looking for if:

    • You don’t mind paying capital gains tax in the knowledge that losses can be offset against profits as a tax deduction
    • Want the flexibility of having no expiry dates on your trades
    • You already have a familiarity with the underlying market and the accompanying terminology, so you’d prefer a product that feels similar

    Spread betting offers its users a great deal; the combination of flexibility and high financial leverage secures spread betting as an extremely cost-effective means of trading. The advantages available to CFD users are certainly comparable, but differences in tax treatment and commissions mean that, more than ever, you should spend some time working out what it is that you want from your trading style before putting your money at risk.

  • arrow