Did you know that the history of investing can be traced back to around 1700 BCE? If you are into investing and are wondering what the difference is between CFD vs spread betting, we are here to help. Our spread betting and CFD guide below will share what they each are and their main differences.
Read on to learn more about the differences between them.
CFD Explained
CFD stands for contracts for difference. CFDs are contracts between financial institutions and investors where investors take a position on the future value of an asset. With CFDs, you don’t have delivery of physical goods or securities.
You do have a contract with a transferrable value. A CFD doesn’t have an expiration date and although they contain preset prices they don’t trade like other securities with buy and sell prices.
Instead, they trade over-the-counter via a network of brokers that organize the demand and supply market for CFDs.
What Is Spread Betting?
In spread betting, investors can speculate on the price movement of different financial stocks. For example, they can make a bet on whether the market will fall or rise on forex, stocks, fixed income securities, and commodities.
Investors can also choose how much they want to risk on this bet. With spread betting you are betting rather than investing.
You don’t need a specific event to happen like you do with fixed-odds betting. Instead, you are allowed to close in the bet whenever you want and take home the profits made or limit your losses. Investors can opt to get into short or long bets depending on where they predict the market will move.
Fees
CFD trading requires the investor to pay the provider transaction fees and commission charges. With spread betting the companies don’t take commissions or fees. Instead, when the contract is closed and the losses or profits are realized, then the investor owes money to the trading company or the company owes them money.
Taxes
With CFD trading you don’t have duty to pay taxes because you don’t own the underlying asset while you’re trading. But, if you have capital gains they are subject to taxes.
With spread betting if you live in Ireland or the UK the profits you make are exempt from capital gains tax and from stamp duty.
Short Selling
With CFDs you have the option to go long and short which allows you to take a long position when the market prices are rising. You can also open a short position if the prices are falling.
When spread betting you can go long and short allowing you to take a long position when the market prices are going up. You can also opt to open a short position when the prices are falling.
Calculating Profits and Loss
To calculate your profit or loss with CFDs you determine the difference between the price where you entered the market and the price you exited the market. Then you multiply that number by the number of CFD units.
With spread betting you calculate your profit or loss by finding the difference between the price you entered the market and the price you exited the market. Then you take that difference and multiply it by your stake.
Spread Betting vs CFDs Advantages
One main advantage is the tax efficiency with spread betting vs CFDs. Spread betting are more tax efficient because of how they are considered by the tax authorities. With CFDs there are Capital Gains tax whenever there are profits.
Another advantage is that there is no commission when you have spread betting positions. CFD positions do charge a percentage of the transaction cost. The costs associated with spread betting doesn’t have a relation to the transaction size so it ends up being cheaper than paying the CFD commissions.
CFDs vs Spread Betting Advantages
One advantage is that CFDs are better for hedging because you can have Direct Market Access which means that any potential losses can be offset against any profits for Capital Gain Tax. This means that in the event the economy tanks, you can protect a share portfolio because you can shorten the shares you want to protect and only have to pay taxes on the total profits made.
Another advantage with CFDs is that you have more price transparency. CFDs tracks the futures so it is easier to see where the pricing for CFD comes from. This means that the prices are adjusted to weigh more in favor of the broker.
With CFDs you don’t have to worry about expiration dates. CFDs are a margined product where a funding charge is placed on the account every time the long position is held overnight. With spread betting you have to think about the expiration date because the position is only open until the contract closes or expires.
One last advantage worth mentioning is the lower spreads. The spreads are not as wide with CFD markets, which handicaps the trader no matter the side of the trade he falls.
Feeling Like a CFD vs Spread Betting Pro?
Now that we have cleared up the CFD vs spread betting debate, you can make informed decisions on where you want to bet your money. Please never gamble with more money than you can afford to lose.
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