The Differences Between Spread Betting and CFD Trading
CFD trading and spread betting are both popular forms of derivative trading, but they have a few key differences. CFD trading involves buying or selling a contract for difference, which reflects the price movement of an underlying asset. Spread betting, on the other hand, involves placing a bet on the per point movement of an asset’s price. Spread betting also offers a lucrative tax benefit on any profits.
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Nature of the Financial Instrument
Both are a type of derivative which tracks the price of the underlying asset but they are traded slightly differently.
- CFDs (Contracts for Difference) are financial derivatives that allow traders to speculate on the price movements of various underlying assets, such as stocks, commodities, indices, or currencies. When trading CFDs, you enter a contract to exchange the difference in the asset's price between the opening and closing of the trade. You trade in number of ‘contracts’.
- Spread betting is a form of wagering on the price movements of various financial instruments like CFDs. Instead of directly trading the underlying asset, you are placing a monetary bet on the per point movement of the price of an asset either up or down.
Legal and Tax Considerations
- CFD trading is subject to capital gains tax in many countries, as you own the underlying asset indirectly. It also allows you to offset losses against gains for tax purposes.
- Spread Betting: Spread betting is currently capital gains tax free in the United Kingdom and some other jurisdictions. However, tax laws may vary depending on your country of residence, so it's essential to consult a tax professional.
Trade Sizes
- CFDs are traded in the number of CFDs, for example, say I bought 5 CFDs of Barclays at 160p worth £8 notional and price rose to 175p. Those 5 CFDs would now be worth 5 x 175p which equals £8.75, I have made a gain of 75p.
- Spread bets are traded in pounds per point movement, for example, if I bought £5 per point of Barclays at 160p and it rose to 175p that is a 15-point move. I would make a gain of £5 x 15 which equals £75.
Commissions
- Spread Betting operates on the spread alone, without separate commissions. Traders make their trades based on the bid-ask spread provided by the broker.
- In CFD trading, traders pay a spread, which is the difference between the buying and selling prices of the asset, along with commissions on equities.
The Similarities Between Spread Betting and CFD Trading
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Speculative Trading: Both spread betting and CFD trading are speculative trading methods. Traders do not own the underlying asset but instead speculate on its price movement. |
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Leverage: Both spread betting and CFD trading offer leverage, allowing traders to control larger positions with a smaller amount of capital. Leverage can amplify both profits and losses. |
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Range of Markets: Both instruments provide access to a wide range of markets, including stocks, indices, commodities, currencies, and cryptocurrencies. Traders can choose from various assets to suit their trading preferences. |
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Go Long and Short: Both spread betting and CFD trading allow traders to take advantage of falling markets by selling (going short) and rising markets by buying (going long) without owning the underlying asset. Profits can be made from downward and upward price movements. |
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Risk Management: You can access all our order types regardless of whether you are trading using CFDs or spread bets. Learn more about our risk management tools. |
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Trading Platforms: Spread bet and CFD trade on our web or mobile and tablet apps for iOS and Android, or with TradingView. Find out more about our platforms. |
HOW TO TRADE ONLINE
Learn how to trade online with Spreadex, including finding a market, opening a trade ticket, entering your stake, executing a trade and monitoring/editing the positions at any time.
