There are numerous ways to trade in financial markets. Two popular methods used by traders worldwide are Contract for Difference (CFD) and Spread Betting. While these two methods share some similarities, they also possess inherent differences that set them apart. This blog post dissects the differences between CFD trading and spread betting.
What is CFD Trading?
CFD stands for Contract for Difference. This type of trading allows you to speculate on global financial markets’ rising or falling prices like shares, indices, commodities, currencies, and treasuries. Essentially, it’s a contract between a trader and a broker where the latter will pay the difference between the entry and exit price of the asset.
What is Spread Betting?
In contrast, spread betting is a type of speculation that involves taking a bet on the price movement of a security. Traders don’t own the underlying asset but make profits based on the accuracy of their prediction.
Difference between CFD and Spread Betting
Taxation
One of the most significant differences between the two revolves around taxation. Profits derived from CFD trading are subjected to capital gains tax, and you can offset your losses against other investment gains. On the other hand, spread betting is tax-free in the UK and Ireland, meaning you won’t have to pay capital gains tax on your profits.
Market Access
CFD trading offers a broader range of markets than spread betting. With CFDs, traders can trade on multiple global markets and enter contracts with currencies, indices, commodities, etc. Spread betting, however, is predominantly practised in the UK and Ireland.
Trading Costs
Regarding trading costs, CFD trading involves paying the spread and potentially a commission to the broker. Spread betting doesn’t involve paying a commission but the spread tends to be wider.
Ownership
With CFD trading, you don’t actually own the underlying asset you’re trading on; you’re simply speculating on its price movement. This is similar to spread betting, where you also don’t own the underlying asset; instead, you’re betting on the direction of its price movement.
Summary
Both CFD and spread betting are popular financial instruments used by traders in the UK, Ireland, and beyond. However, each has its own set of pros and cons. It’s essential that traders fully understand the mechanisms, risks, and benefits of each instrument before deciding which is suitable for their trading strategy.