Difference Between CFD and Spread Betting
August 1, 2018
Spread-betting is a way to speculate on the movement of a financial product, like a currency pair, a stock or an index. All this, without owning the product, but simply making a “bet” on the direction the product will move.
Recently, because of the increase competition between brokerage houses, Forex brokers introduced various other instruments, besides the classic currency pairs. Such products are commodities (not only gold, silver, and oil but also other commodities like platinum, cotton, cocoa, iron ore, natural gas, etc.), indices and CFD’s (Contracts for Difference).
At the first instance, there seems to be no difference between spread betting and a CFD instrument: they both allow to trade the underlying financial instrument without owning it. However, a closer look at details reveals major differences between the two.
Spread Betting Characteristics
Spread betting is popular in the United Kingdom because the outcome is exempt from stamp duty and capital gains tax since the underlying product is not own. This appeals to traders and makes it popular among retail traders.
With spread betting, there is no commission associated with the trade, so there will be no additional charges to the trading account, besides the spread. However, holding costs may apply, similar with the swap costs in a regular Forex trading account.
Like the name suggests, spread betting implies the trader “bets” on the spread between the opening and the closing price: the bigger the distance, the better if the direction is the one intended. Of course, the opposite is true and a loss will be proportional.
The main difference between spread betting and trading a CFD is that for the CFD, a commission is always charged. This tends to be quite substantial.
Moreover, the margin blocked in the trading account is bigger than the margin blocked when trading a regular currency pair. This margin represents a sort of collateral the broker takes for that respective trade.
This is a negative point for CFD’s, but not everyone can trade spread betting. Many brokers do not allow spread betting outside UK or Ireland, and only CFD trading is available to customers globally.
A capital gain tax is applied when trading CFD’s, and this is coming to further diminish the potential profit from trading.
Other than that, the two products are relatively similar, in the sense that the trader is putting the money on a product that is not owned, and will win if the product moves in the right direction, or lose if it moves the other way.
Going long as well as short is allowed, and all technical and fundamental factors are the same as normal trading. Only the products are a bit different.
All in all, spread betting and CFD trading bring the possibility to trade products that otherwise were not possible to have access to shares, indices, commodities, etc., all these are available via spread betting or CFD.
A trader must know the differences and costs associated with trading them, to take the best decision possible before opening a trading account.