One common confusion out there in the trading public at large is the difference between CFD’s & Spread Betting. The difference can be hard to see, but there is a very important similarity between the two products in the fact they are both leveraged investment products.
The Similarities
- Both products are derivative based products. This means you don’t own the underlying share or commodity but are trading on movements in prices within that particularly asset class.
- Both CFD trading and Spread Betting involve margin trading. You only put up a initial deposit to cover your position.
- You have the option to both short and long asset classes. Allowing you to potentially profit during both bull and bear markets.
- (UK) As you do not own the instrument you do not have to pay Stamp Duty.
- Many of the markets on offer through both CFD trading and Spread Betting are the same.
Differences
- Prices offered by spread betting companies are synthetic, i.e the spread is determined by the spread betting company. While CFD prices often reflect the underlying the value of the traded commodity.
- One important thing to remember is that a CFD company makes its money of the commission and interest charged. If you lose money on the trade you undertook beyond these costs your CFD trader doesn’t make any extra money. This is different from Spread Betting companies.
- CFD trades are undertaken in a the currency of the underlying asset, so there is a very slight risk from currency price swings.
- Costs of financing a CFD trade are not quoted in the overall price as within in Spread betting. But there is a separate financing cost.
- A positive for CFD’s is that a CFD owner takes part in the corporate actions of the company, when holding a share CFD position.
- CFD profits are subject to capital gains tax where as Spread betting profits are not as they are deemed to be gambling. Though Spread betting losses can’t be used to offset tax in the same way CFD losses can.
- CFD’s can typically be held for longer periods than Spread bets can, which means in certain situations it may be more beneficial to use CFDs. Most spread bet traders aim to get in and out of a position within a day.
These are the main differences between CFD trading and Spread betting. In future posts we will examine how and when one should use CFD trading and Spread betting.
