Comparing CFDs and Spread Betting

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Spreadbetting and Contracts for Difference (CFD) are two of the most popular forms of investing within the financial markets these days. Their customer bases comprise both large numbers of individual traders and corporate bodies.

In order to help you decide which one is more suitable to your objectives and aspirations, this article lists their key similarities and differences.

 

What are their Primary Similarities?

You can obtain high leverage facilities when you trade Spreadbetting and CFDs. This important feature implies that they both enable you to acquire larger profits than you normally would if you were totally reliant on just your own cash reserves.

However, high leverage also means that both Spreadbetting and CFDs harbor higher levels of risk than most other forms of traditional speculating.

 

What are their basic differences?

The primary difference between CFDs and Spreadbetting is their tax treatment. Essentially, the latter appears superficially to have the advantage in this respect as it attracts no taxation whatsoever. This is because most countries view spread betting as a gambling pursuit and not a proper financial instrument.

In contrast, CFDs are subjected to tax liability in the form of capital gains because they are classified as an investment. However, this status does have its advantages as you can offset your losses against your future tax obligations.

 

There are also other significant similarities and differences between the two which will now be reviewed.

 

Similarities in Detail

1. Both Spreadbetting and CFDs are derivatives which infer that their transactions do not require that you purchase any ownership in the underlying asset whatsoever.

2. As already stated, both permit you to access extensive leverage facilities with all the benefits and risks that entails.

3. When you open positions with either CFDs or Spreadbetting, you will always trade on a margin. This means that you only need to support your active trades by wagering just a small proportion of their total cost.

4. Both enable you to profit from rising and falling markets.

5. As both do require that you to own the underlying asset, you will not incur Stamp Duty in either case.

6. In both cases, you sell at the bid price while purchasing at the offer price.

7. Both permit you to restrict your risk exposure by placing stop-losses.

8. Their terminology is almost identical.

 

Differences in Detail

1. Spreadbetting brokers manipulate the assets prices that they quote in order to include their commission charges. Such actions infer that the displayed prices can differ significantly from the true market values.

In contrast, you are the price maker whenever you trade CFDs. As such, their costs tend to be cheaper than the equivalent ones of spread betting. In addition, asset prices quoted for CFDs tend to be very close to those listed by the financial markets.

2. A major difference between trading CFDs and Spreadbetting is the counter-party. When you open a CFD position, you do so against another real-live second party. You CFD broker is not directly involved in the transaction whatsoever as its makes its profits from the commissions and fees that it charges you for its services.

In contrast, when you activate a position using spread betting, you do so in direct competition with your spread betting broker. This feature infers that this firm has a vested interest in you losing your bet. They do not only acquire profits from the fees that you incur from utilizing their services but also from your losses. This is the primary reason why spread betting is classified as gambling and not subjected to taxation.

3. As spread betting brokers are market makers, they can basically quoted whatever asset prices they prefer although most of them are controlled to some degree by the industry’s regulators.  However, you are more likely to suffer from problems, such as requotes and price freezing, etc. when you trade using spread betting as opposed to CFD trading.

4. When you execute CFDs, the price domination is determined by the currency of the underlying asset. For example, if you open a CFD based on gold, then your losses and profits will be recorded in US Dollars.

In contrast, when you are spread betting all assets are quoted in sterling. This feature may be an advantage or disadvantage depending on your circumstances.

5. CFDs are liable to financial fees. For example, if you opt to rollover your position throughout the night, then it will incur an interest charge if it is a long trade. However, short positions earn interest which will be credited to your account.

Spreadbetting is exempt from such costs.

6. Spreadbetting is restricted by predetermined expiry dates whereas CFDs can continue for as long as you choose.

7. If you possess a CFD based on a firm then you are entitled to partake in the shareholding decisions of that particular company. You have no such rights when spread betting.

8. Any profits your acquire trading CFDs are subjected to Capital Gains taxation whereas your gains from Spreadbetting are totally exempt.

9. You are entitled to initiate an advisor facility with your CFD broker which will entitled you to receive expert advice about trading opportunities, etc. No such services exist for Spreadbetting.

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