Contracts for Difference (or CFDs) and Spread Betting offer traders some of the most popular and attractive trading options in the current market environment. Individual have become increasingly interested in these trading instruments with the advent of internet based trading systems that can be accessed from anywhere with a stable connection. While there are some restrictions for these types of trades in the US markets (due to various securities regulations).
Many of the benefits of both of these instruments come from the fact that they given investors the opportunity to speculate on price movements in almost any market and to open positions that are leveraged through margin deposits and maximize potential gains.
Spread Betting and CFD Similarities
Both CFD and Spread Betting trades involve a high degree of leverage that can enhance both the potential gains and losses that are seen in any individual position. This essentially means that potential gains have nearly limitless potential and traders can quickly multiply their account size through prudent trade planning. While there are risks involved with any leveraged investment, brokers of both trading types offer strategies (such as stop losses or hedging tools) that can help traders limit the downside and focus on the upside. As far as trade forecasting, there are also many similarities, as traders of both tend to focus on similar market elements (such as economic events or technical chart patterns) to determine their position stances.
Spread Betting and CFD Tax Differences
But even with these similarities, traders looking to choose between one instrument or another must understand the differences so that the right trading options can be selected. For traders in some locations, the most important difference might be in the tax advantages that are offered by Spread Betting traders (assuming that Spread Betting is not the main source of income for the investor). In places like the UK, Spread Betting is considered gambling rather than an investment. This, along with the fact that no tradable instruments are directly bought or sold, capital gains tax cannot be applied to any earnings gained in this manner.
CFDs on the other hand are subject to capital gains tax liability. But CFDs do have the benefit of being exempt from stamp duties, and this is something that can make a large difference to investors trading is bigger lot sizes. Anther benefit of CFDs is that any losses can be subtracted from trading profits that are achieved in the future, and this provides additional tax advantages in that liabilities can be reduced. Spread Betting, on the other hand, does not come with this benefit.
Spread Betting and CFD Pricing Differences
Along with taxing considerations, there are also key differences in the way each instrument is priced. When Spread Betting, investors are looking at the number of “pips” that are gained or lost in a trade. The number of pips is multiplied by the lot size to determine the total gain or loss in the trade. CFD trades, however, are priced in ways that are more similar to traditional share trading. Because of this, CFD brokers tend to focus on transaction fees as a means for charging traders, rather than spread differences. In CFD trades, a percentage of your margin position will be added to any interest charges (in order to pay for the leverage that is undertaken) and all of these charges are deducted from your account when trades are completed.
Based on these similarities and difference, each trader must assess the benefits and drawbacks that are in place for each instrument type and compare those alongside your investment goals and trading styles. Although most of the asset choices are the same, profits and losses can vary greatly once all transaction costs are considered.