Spread betting, and CFD trading are both leveraged trading products with many of the same benefits. They are both margined products, which makes them similar. This implies you may establish a relatively large position while just putting up a small percentage of the entire trade value.
Spread betting and CFDs are closely related terms that confuse many beginners. Both are different terms, yet there are many things in common. It requires different mindsets and skill levels to trade either of these trading products.
This article will compare spread betting and CFD (Contracts for Difference) trading. Besides this, some key factors to know when choosing CFD or spread betting products.
Contracts for difference, or CFDs, are derivative contracts between investors and financial institutions in which investors speculate on an asset’s future value. Spread betting, on the other hand, allows investors to decide whether the market will rise or fall. Differences in a settlement between open and closing trade prices are settled in cash.
CFDs do not involve the delivery of physical goods or securities, but the contract has transferrable value while in effect. The CFD is, therefore, tradable security established between a client and a broker, who exchange the difference between the trade’s initial price and its value when it is unwound or reversed.
Although CFDs allow investors to trade futures price movements, they are not futures contracts in and of themselves. CFDs do not have fixed expiration dates and prices but trade like conventional securities with buy and sell prices.
CFDs are traded over-the-counter (OTC) via a network of brokers that organise market demand and supply for CFDs and set prices accordingly.
Spread betting allows investors to speculate on the price movement of various financial instruments, including stocks, forex, commodities, and fixed-income securities. In other words, an investor makes a bet based on whether they believe the market will rise or fall from the time their bet is accepted.
They may also decide how much they wish to risk on their bet. It is promoted as a tax-free, commission-free activity vehicle that allows investors to speculate in both bull and bear markets. The bet itself is non-transferable.
Spread-betting companies supply potential investors with buy and sell prices so that they may position their investments with the buy price if they believe the market is going up or the sell price if they believe the market is going down. Spread betting, unlike traditional investing, is a type of gambling. It does not require a specific event to happen, unlike fixed-odds betting.
You may close the bet at any time and collect your winnings or limit your losses. FSB (financial spread betting) is a margined derivative product that lets you speculate on the price movements of many financial markets and products, such as stocks, bonds, indices, and currencies. Depending on the prediction or direction of the market, an investor can place long (equivalent to buying a share) or short (similar to selling a share) bets.
CDFs and spread bets are leveraged derivative products with underlying asset values. The investor has no ownership of assets in the underlying market in these trades. Trading contract for differences involves wagering on whether the value of an underlying asset will rise or fall in the future.
Contracts with CFD providers are negotiated with the option of both long and short positions based on the underlying asset prices. Long positions are taken by investors who expect the underlying asset’s value to rise, while short positions are taken by investors who wish the asset’s value to fall. In both cases, the investor expects to profit from the difference between the closing and opening prices.
Similarly, a spread is defined as the difference between the spread betting company’s quoted buy and sell prices. The asset’s underlying movement is measured in basis points, with the option to purchase long or short positions.
Initial margins are required as a preliminary deposit in CFD trading and spread betting. Margin generally varies from.5% to 10% of the open positions’ value. Investors might expect higher margins for more volatile assets and lower margins for less risky assets.
Even though investors in CFD trading and spread betting contribute just a tiny percentage of the asset’s value, they are entitled to the same gains and losses as if they paid 100% of the value. In both investment strategies, however, CFD providers or spread betting companies may contact the investor later to request a second margin payment.
Investing involves risk, which can never be avoided. However, it is the responsibility of the investor to make strategic decisions to avoid severe losses. Potential profits and losses in CFD trading and spread betting can be 100% equivalent to the underlying market.
A stop loss order can be placed before contract initiation in both CFDs and spread bets. A stop loss is a predetermined price that, when met, automatically closes the contract. Some CFD providers and spread betting companies provide guaranteed stop loss orders at a premium price to ensure providers close contracts.
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One of the most significant differences between spread betting and CFD trading is how profits from these two derivatives are taxed.
Because you never possess the underlying asset, tax law in the UK and Ireland exempts both types of trading from stamp duty. On the other hand, CFD trading is subject to capital gains tax (CGT), although spread betting is not.
If you profit from CFD trading, you must pay capital gains tax on that profit. If you lose money when trading CFDs, you can use it to offset profits from subsequent CFD trades or other financial instruments. Spread betting profits are not taxed, but spread betting losses cannot be used to offset gains from CFD trading or other investments.
The trading costs for CFDs and spread betting are another difference between them. In contrast to spread bets, which never charge charges, opening a CFD trade may require you to pay a commission or transaction fee. The positive news is that many CFD vendors now give commission-free trading.
You will have to pay a spread whether you want to trade CFDs or spread bet. This is the difference between the asking price and the bid price for the underlying asset that you are trading. Spreads can fluctuate depending on the asset and market liquidity.
Another thing to bear in mind when using CFDs to trade forex is that you must purchase the CFD in the appropriate currency for the forex pair you want to speculate a bet on. As a result, your broker may charge you currency conversion fees if you trade forex pairs in currencies other than the US dollar or the British pound.
You need not worry about paying currency conversion fees because spread bets on forex pairs may be opened in any currency.
Another distinction between CFDs and spread bets is whether or not contract expiration dates are a concern.
The dates of CFD contracts do not have an expiration date. Contracts are typically laid out for one month at a time, but before the old contract expires, your broker will automatically roll over your position into the new one. Thus, you are open to remaining in your position for as long as you like (although there may be fees and increased margin requirements if your position is losing money).
On the other hand, spread bets do have expiration dates. Spread bets typically come in two types: those that expire at the close of the trading day and expire every three months. Depending on your broker, you might be able to convert your spread bet into a new contract. Your bet will be automatically closed at expiration if you don’t roll over your contract.
The Financial Conduct Authority regulates spread betting and CFD trading in the UK (FCA). It establishes guidelines for how brokers can provide leveraged financial instruments for retail investor accounts. This is the UK’s leading financial watchdog.
Spread betting is only allowed in the UK and Ireland, a vital point to remember. CFD trading is nevertheless legal everywhere around the globe. So, the FCA regulates all UK brokers that provide spread betting. However, certain brokers who offer CFD trading in the UK could be subject to foreign regulatory bodies, including the Cyprus Securities and Exchange Commission (CySEC).
Investors should be aware that CFDs and spread betting are not permitted for cryptocurrency trading in the UK. Trading in all bitcoin derivatives, including CFDs and spread betting, has been outlawed by the FCA.
While many CFD brokers use the world’s most widely used trading platform, MetaTrader, most spread betting providers have their own proprietary trading platforms.
This is important since MetaTrader’s CFD trading platform allows users access to advanced features like:
Spread Betting: Forex, Stocks, Indices, Commodities, Cryptocurrencies, and more.
CFD Trading: Forex, Stocks, Indices, Commodities, Cryptocurrencies, and more.
Tips for choosing a forex broker - Not all brokers are equal — 2023Spread Betting: No
CFD Trading: No
Spread Betting: Yes. You can make money from both rising and declining markets.
CFD Trading: Yes. You can make money from both rising and declining markets.
Spread Betting: Mainly available to residents of the UK, Ireland, South Africa and Australia due to tax benefits. Not limited to these countries.
CFD Trading: Available to customers globally. Some countries have banned it e.g. the United States.
Spread Betting: No commission but typically higher spreads than CFDs.
CFD Trading: Zero, or low commission, with lower spreads depending on account type.
Spread Betting: Individual.
CFD Trading: Individual and Corporate.
| Features | Financial Spread Betting | Contracts For Difference |
|---|---|---|
| Leveraged | Yes | Yes |
| Overnight Financing | Yes | Yes |
| Expiry Date | Far in the future | No |
| Hedging | Possible but losses are not tax deductible | Ideal for hedging as losses can be offset against taxable profits |
| Direct Market Access (DMA) | No | Yes |
| Dealing | GBP (or currency of your choice £/$/€) per point | Number of CFDs |
Which is better, CFD or spread betting? There are several factors to consider while deciding between CFDs and spread betting. Even though the tax status may be the most visible difference between the two, other factors may significantly affect your total profitability.
For instance, trading on the same markets, such as forex, stocks, indices, commodities, and cryptocurrencies, is possible with spread betting and CFD trading.
However, using ECN (Electronic Communication Network) or STP (Straight Through Processing) technology, CFD traders may have the ability to trade directly with the broker’s liquidity providers (typically tier-one banks and hedge funds).
This makes it possible for traders to get spreads of an institutional calibre, and as narrower spreads imply lower expenses, this might lead to bigger profits.
Spread betting cannot provide the ability to trade with banks or hedge funds and obtain institutional-grade spreads since it entails betting on the idea that prices will rise or fall. Traders can access the ability to trade directly with banks and hedge funds to benefit from smaller spreads and blazing-fast execution since CFDs include trading the underlying market price via contracts.
Financial derivatives like spread betting and CFD trading let you speculate predictions price of an asset without actually owning it.
It’s essential to understand the differences between spread betting and CFD trading before making a decision. Spread betting has a big advantage over CFD trading because it is free from capital gains tax in certain countries. However, CFD trading is possible outside of the UK and Ireland because CFD contracts have no expiration date unless you trade a futures contract (a derivative thereof).
Familiarise yourself with how spread betting works and what CFD trading entails before opening an account with a broker.
Leveraged derivatives are used in spread betting and CFD trading to let you speculate on an underlying asset’s price without actually owning it. However, they represent different forms of trading with different fees and tax implications.
