Financial Spread Betting vs CFDs: Which one to choose? (Plus Video)
Financial Spread Betting or Contracts for Difference?
Which one should you choose? They may appear almost identical:
You can trade on a wide range of markets
Trade Forex, Gold&Silver, Shares, Indices and Futures.
You can go long or short
With Spread Betting and CFDs you can buy (go long) or sell (go short).
They give you the ability to go long as well as short, so taking a long position when market prices are rising or opening a short position when prices are falling will both yield a positive result and vice versa.
What does “going short” mean?
If you expect that an asset will experience a loss in value, you can sell CFDs based on it or place a sell spread bet on it. Your profits will rise in line with any fall in that price and your losses will increase with any rise in the price.
The more market prices move in the direction you anticipated, the more profit you will make. The more they move in the opposite direction, the greater your loss will be. It’s you who decides how long to keep a position open and when to close it.
There is no stamp duty
Because both allow traders to trade on the price movements, without actually owning the underlying assets, it is not needed to pay Stamp Duty.
Both involve a high degree of leverage
Spread betting and CFDs are leveraged products, which means that taking a position is possible by depositing just a small fraction of the total trade value. In other words, it is not necessary to put up the full trade value in order to open a position.
Risks of high leverage
If the underlying market movement is in your favour, you may achieve a good profit, but an equally small adverse market movement can not only quickly result in the loss of your entire deposit, but may also expose you to a large additional loss over and above your initial deposit. Ensure you understand the risks.
For example, with DF Markets’ Spread Betting, the leverage for some Forex currency pairs is up to 400:1, meaning that to place a bet worth £10,000, you’d only have to deposit £25.
With DF Markets’ CFDs, the leverage for some Forex currency pairs can be as high as 200:1, meaning that your £50 can open you a deal worth £10,000.
This may be good in some cases and it may increase your profits just as much as your losses, so be very careful when using high leverage.
But here are some important differences:
|How?||You bet on the price movement of the underlying market||You buy contracts that follow the price of the underlying asset|
|Result||You profit/loss from falling or rising prices||You profit/loss from falling or rising prices|
|Dealing||You are buying company XYZ at £1/point||You are buying 1 company XYZ CFD|
|Taxes||- Stamp Duty Tax Free|
- No Commisions
- No Capital Gains Tax
|- Stamp Duty Tax-Free
- Liable for Capital Gains Tax
- For shares, ETFs - 0.05% to 0,1%* of the trade (No commission for Cash CFDs)
- No commissions for others
|Positions||Can be as small as 1 to up to 10,000 units depending on the instrument||Can be as small as 1 CFD|
|Account Currency||British Pound (GBP)||Variety of currencies|
|Calculation of Results in||British Pound (GBP)||Variety of currencies|
*Min. 2 EUR for share CFDs and min. 1 EUR for ETF CFDs
An example of Spread Betting Trade:
— You expect the price of XYZ company shares to rise.
— At the moment the price is 250p per share. You decide to place a buy bet of £10 per point.
— For every point this price increases, you stand to make £10 profit. And for every point the price decreases, you stand to make £10 loss.
— Two months later, the share price reaches 300p, and you decide to close your position.
— So we have (300p – 250p) x £10 = £500 (profit). If the price has decreased to 200p, you’d incur a loss – (250p – 200p) x £10= £500 (loss)
An example of CFD Trade:
— You buy 10 XYZ company shares at the price of 250p per share because you expect that the price will rise.
— Since this is a share and you’re trading CFDs, apart from paying for the price of the shares, your cost will include the broker’s commission (in this example assumed to be £10).
–Two months later, the share price reaches 300p, and you decide to close your position.
–So again, (300p – 250p) x 10 shares = £500 – Broker’s commission (£10) = £490 (profit). If the price has decreased to 200p, you’d incur a loss – (250p – 200p) x 10 shares = £500 + Broker’s commission (£10) = £510 (loss)
*If the account of the client is in a different currency than the currency of the CFDs (in this example British pounds), then the final result will be converted to the other currency (on the current exchange rate).
Which one is the best for you?
Spread betting could be for you if you want…
More tax-free profit
Uniform trading currency
Absolutely no commission
CFDs could be for you if you…
Want full control over the size of your deal
Plan to offset losses against future profits for tax purposes
Want to trade cash CFDs with 100% margin
Disclaimer: Tax treatment is dependent on individual circumstances and tax laws are subject to change.