Spread betting and CFD trading are both popular ways of speculating on financial markets. But with many providers offering both spread betting and CFD trading, how do you choose which method is right for you?
As with any form of financial trading, it is important to do your research thoroughly in order to make informed decisions. Please be aware that spread betting and CFD trading are high risk products. Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
Video Comparison of Spread Betting and CFDs
Here, IG takes a quick look at some of the key differences between the two products:Derivatives
Both products are derivatives, which means you do not own the underlying share, currency or commodity. Instead, you speculate on how the underlying instrument will perform within the financial markets.Because you do not own the instruments, you currently do not have to pay stamp duty on your returns**. However, you do have to pay capital gains tax on CFD profits. Like many things in trading, this is both an advantage and a disadvantage. Losses made in CFD trading can be offset against future profits for tax purposes, whereas losses in financial spread trading are gone for good.
Trading Costs
Another major difference between the products is the way they are paid for. In spread betting, the price is built into the ‘spread’, the difference between the buying and selling price that must be covered by the trader before a profit can be made.CFD trading is paid for by a small commission charge. Because of this difference in pricing, Contracts for Difference generally have tighter spreads.
Trading Period
The contract periods between spread trading and CFD trading is a further difference.Spread bets have a fixed expiration point and will close when the contract runs out. Contracts are usually daily, monthly or quarterly, and bets can be rolled over at a charge. Sometimes bets are automatically rolled over eg rolling daily spread bets.
CFDs have no such expiration date and can be kept running indefinitely.
Spread Betting vs CFDs: Forex Differences
In spread betting, trades are always denominated in your local currency (pounds sterling in the UK). This is not the case with CFDs, which are traded in their native currency.So if you are trading on stocks on the US stock exchange, not only will you have to think about the rises and falls of that particularly stock, you will also have to think about the changes in exchange rate between sterling and the dollar. Obviously this can go in a trader’s favour, but be warned, it can also reduce profits or increase losses.
** Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
More on Spread Betting and CFDs
For a more detailed look at spread betting and CFDs, please see:
Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.