Some of us might be well aware of how investments in financial markets can lead to large rewards.
Even when one has put in the time to research, and then decide to make an investment, there is always the question of how, what, when, and how much.
Or we can take another term that has become mainstream within the business world – you have to spend money to make money – and develop it a little. This, unfortunately, for many, means that they never get past the research stage.
Ever since the very first trade, people have been trying to figure out the best way to enter the market. In other words, the objective of this article is to introduce you to the concept of spread betting and CFDs, as well as what the differences between spread betting and CFDs are. So, without further ado, let’s get started with an introduction to both.
An Introduction to Spread Betting and CFD Trading
While spread betting and CFD trading have, in essence, the same function, some key differences need to be understood by potential traders. Firstly, it is important to establish that both spread betting and CFDs are margined products, potentially providing the same economic benefits to a multitude of investments, including but not limited to currencies, indices, shares and cash products.
Despite both serving similar functions and being highly leveraged trading opportunities, they are considered to be very different by the majority of . The main reason for this is that depending on the potential investment, one would be seen to be much better suited than the other. Knowing this alone will clearly explain why it is so important to have a grasp on the differences.
So yes, while the differences may be subtle, they will still determine which you should opt for, depending on the situation of course. Perhaps the first, and possibly even the most important, difference between spread betting and CFD trading that you will hear about is taxation. For example, spread betting is exempt from Capital Gains Tax (CGT), whereas you are required to pay CGT when CFD trading. Moreover, while CFDs are available worldwide, spread betting is only possible in the United Kingdom and the Republic of Ireland. Nevertheless, tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
CFDs are viewed by many as part of the market and therefore considered as financial transactions rather than financial spread betting. In contrast, spread betting is often described as an extra market transaction. To gain a deeper understanding of the differences between the two, let’s take a closer look at them individually.
CFD Trading
CFDs, or Contacts for Difference, allow the trader to take a position on the potential future value of an asset. In this sense, they are derivative contracts between financial institutions and the traders themselves. The contract itself has what is called a transferable value, as there is no actual delivery of physical goods or securities when CFD trading. A CFD is therefore a tradable security and one which is agreed upon by both the client and the broker.
The trading aspect of CFDs is that it exchanges the difference in price between the moment the contract was opened and when it is eventually closed. So, if you predicted a positive change in the price of crude oil brent, your profits or losses will depend on how the markets move for that particular asset. The risk, of course, is that if the share price falls, you lose money. However, if you believe that a share price will raise, you can buy CFDs and will profit just as you would buying standard shares.
Spread Betting
In essence, spread betting allows a trader to make a bet based on their prediction as to whether or not the market will rise or fall. Traders can try to predict and bet on the price movement of any number of financial instruments, including commodities, popular currency pairs such as GBP/USD and EUR/USD in the forex markets, or the US NDAQ 100-cash derivative index.
While not without its risks, spread betting has garnered much attention due to the fact it is both a tax-free and commission-free activity. A potential trader positions their actual investment with the buy price or the sell price, depending on how they envision the market behaving. If they see the market going up, they will position their investment with the buy price, however, if they believe the market price is going down, they should position their investment with the sell price.
Spread betting is different to fixed-odds betting in that it is not reliant on a particular outcome occurring. In the same way, many modern sports betting companies allow you to cash out before a game has finished, spread betting gives you the option to complete the bet at whatever time you see fit, and either receive the profits you have made or stop the losses you have accumulated at that point.
To put it in its simplest terms, spread betting allows any trader to risk an amount of money per point of price movement in an underlying asset. So, if you are spread betting on the FTSE 100 index, upon which the derivative UK 100 is based, that means that you’re using spread bets – which are a financial derivative – to take a position on the price of the FTSE 100 rising or falling. Furthermore, you have the option to go either long or short.
Conversely, if the market prices are on the rise, you have the option to take a long position. At whatever point you choose to close the bet, simply calculate the difference in price between when you entered and exited, and then multiply this difference by your stake. This will calculate your overall profit or loss.
The Bottom Line
As you can see, while the similarities may be more numerous than the differences between spread betting and CFDs, they are of vital importance. They both use very similar technology, and both offer a wide array of markets in which to use them. Stating this, however, it is important to take the information provided in this article into account when deciding which is best for you.
In conclusion, CFDs do not have an expiry date. It is important to note that when taken in a long position, as a margined product, a daily charge is imposed on the account when held overnight. However, if you open and close the position within the same day, you will not be charged interest on the account.
As you can see, there are many intricacies that are incredibly beneficial to be aware of. Additionally, with short positions, there is an interest rebate with CFDs. If we compare this again with spread betting, this has an expiry date due to the fact that the position closes as soon as the agreed-upon contract expires.
When it comes to tax, CGT is mandatory to pay for CFDs. This is in contrast to the situation for spread betting, which is tax-free. Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
However, the losses suffered when spread betting are not tax deductible.
While every difference between the two has not been outlined in this article, the key differences between their functionality have been laid out.
Finally, please consider that 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.
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. The writer may or may not hold investments in the companies under discussion.
