Spread betting and CFD are used for trading in different financial markets. Although they are both leverage-based derivatives and they share a lot of similarities, there are significant differences in the two products. To understand which product to use, it is fundamental for one to understand their differences.
The spread betting technique entails placing a bid based on the speculation of whether the price of an asset will fall or rise. The trader’s stake is their choice, which means that they choose how much they bet per movement. Two prices are quoted for these bets, the bid price, and the ask price. The difference between the two prices is the spread; traders consider it their profit.
CFD trading revolves around the underlying market. The trader buys and sells contracts. When using this technique, a trader buys and sells a specific number of CFDs contained in an instrument, which is similar to the trade of physical instruments. However, when you are using CFD trading, you do not get the ownership of the asset.
Spread Betting vs. CFD Trading: The Differences
The tax implication of the two products is the main difference. When working with spread betting in the UK, the trader is exempt from capital gains and stamp duty tax. However, when a trader is using CFD trading, they are liable for the capital gain tax but exempt from stamp duty in the UK. The tax treatment for these instruments varies from one jurisdiction to another; making it essential to check the tax obligation accompanied by these instruments in a trader’s jurisdiction before opening a trade account.
Availability of the Product
Not everyone can use both of these products. Traders can use CFD trading from any part of the world; it is open to international traders. However, Spread betting is exclusively available to UK and Ireland citizens. Therefore, as you trade using either of the products, make sure to look at the regulations before opening a trading account.
When a trader is using CFD trading, the fees are in the form of a commission charged on the markup in the spreads. However, in spread betting, the fees are included in the spreads, but there are no added commissions charged. One thing that is common about these charges is the fact that they both have holding fees.
Calculation of the Profits/ Losses
When a trader uses spread betting, the profits or losses are calculated by finding the difference between the bid price and ask price; the difference is multiplied by the trader’s stake. While using the CFD technique, loss or profit made is reached at, by calculating the difference between the price at which the trader enters and the price at which they exit, the difference is multiplied by the units of CFD they own. Before a trader uses any of these products, you should familiarize yourself with the revenue calculations.
Expiry of the Product
The expiry of this instrument defines the period in which it can be recognized. Spread bets have an expiry date, and they cannot be used past the expiry date. On the other hand, CFDs do not have an expiry date. When using spread bets, it is essential to check the expiry date of the product.
Suitability for Hedging
The two products can be used for Hedging. However, CFD trading is better suited for Hedging when compared to spread betting.
Type of Accounts
When using spread betting, institutions only create individual accounts. However, when using CFD trading, the trader can choose either an individual or a corporate account.
Trading with Banks
Traders using CFD can trade with the bank directly because they trade through contracts. On the other hand, traders using spread betting cannot trade directly with the banks because betting is based on the prices fluctuating either upwards or downwards.
A trader has to choose between a CFD and a spread betting product. The choice should be made after considering the convenience and inconvenience that each product provides. The difference between the two products ranges from availability, tax implication, profit calculation, product expiry, account availability, and the type of account that one can access. Collectively, these differences should assist traders in differentiating these two products and when choosing the product that suits them best.