What do you need to know about CFD vs Spread Betting? The world of trading offers so many opportunities, possibilities, platforms, brokers and products that it is sometimes difficult to find.
Among the most well-known terms, CFD (Contract for Difference) is the one that appears most often. It is the main product of Forex brokers. We find CFDs on currencies, indices, commodities, cryptocurrencies, stocks, among others. But there is another Anglo-Saxon term that is also frequently used, “Spread betting.” In this option, there is again something for all tastes and spread betting is plentiful.
The confusion about CFD vs Spread Betting gets even bigger when most brokers offer both ways to access the markets. And sometimes individual traders don’t even know which financial instrument they are trading in.
What is the difference between CFD trading and Spread Betting trading? How to distinguish the products?
CFD vs Spread Betting: Definitions
Spread betting, also known as spread trading, refers to a trading strategy that enables traders to speculate on the prices of many financial instruments such as stocks, commodities, indices and currency pairs. It is a legal and alternative option to traditional trading, allowing investors to profit from the upward or downward movement of financial instruments prices without actually owning the underlying asset.
In the case of CFDs, trading depends on the difference in price of the underlying asset between the time you open your position and the time you close your trade. The trader’s gain or loss will depend on the volume difference between the opening of the position and its closure.
CFD vs Spread Betting: Differences
The main interest of Spread betting in the UK is tax: profits or earnings are not taxed! We quickly understand the interest this instrument can have among many traders.
On the other hand, outside the UK, it will be necessary to resort to CFDs which are taxed most of the time.
But spread betting is mostly used mainly by beginners. In addition to offering a “bet”, the offer is aimed at the general public. It is also not easy to handle large sums of money with spread betting. This usually requires Direct Market Access (DMA), which is not available for Spread betting.
However, CFD brokers may offer DMA. Above $100,000 dollars, it becomes unavoidable. Furthermore, professional traders or investors often turn to CFDs instead of Spread betting depending on their needs.
Another comparison detail is about the commissions that make the difference between the two types of accounts. In spread betting there are no commissions. The broker is remunerated mainly by the difference between the purchase price and the sale price of the products. This is generally less favorable for the user than for CFDs. But on the other hand, commissions are added when using CFDs. And even if the principle is different, the trader still pays one way or another.
And finally, taxation is not the same. Because there is no tax to pay in spread betting, unlike CFDs.
What are the opportunities and risks of CFDs?
As with any market, there are opportunities and benefits as well as risks. Sometimes there is also a high risk involved in CFD trading.
What are the advantages of CFDs?
- Small stake: With CFDs, large sums can be moved with small stakes.
- Leverage: The leverage effect enables a disproportionate participation in the price development of an underlying asset.
- Cheap trading fees.
- Canbe used flexibly: With CFDs, investors can bet on both rising and falling prices of an underlying asset.
- Extensive selection: CFDs are offered on almost all liquid asset classes and underlyings.
- Transparent pricing: The value of a CFD always corresponds to the difference between the entry price and the exit price.
What are the disadvantages of CFDs?
- High risk: If the price of the underlying develops unfavorably, there is a risk of suffering significant financial losses, up to and including total loss, due to the leverage effect.
- Time consuming: The investor must be able and willing to invest a significant amount of time to continuously manage and control their CFD positions.
- Price gap risk: If an underlying exhibits high volatility, there is a price gap risk (slippage or gap risk). This can lead to positions suddenly losing value or orders being executed at a more disadvantageous rate.
- Default risk: If the CFD broker or market maker becomes insolvent, there is a risk to not receive trading profits made on open positions.
- Transaction fees.
- Technical risks: Due to system errors, system crashes, transmission errors, other hardware or software malfunctions or an interruption in the Internet connection, it may happen that orders cannot be transmitted or executed at all, with difficulty or not on time.
Conclusion
Beginner traders who don’t have a decent capital can start trading CFDs, being aware of the risks, to try to make decent profits in a short time, and that’s thanks to leverage. In the long term and with higher values, it is better to trade without leverage.
Meta description: The confusion about CFD vs Spread Betting gets even bigger when most brokers offer both ways to access the markets. Learn the difference.
