At first glance, CFDs and spread betting appears almost identical:
1. The charts from CFDs and spread betting allow traders to go “Long” or “Short”.
2. You are not allowed to own an underlying asset on both trades and because of that you are not required to pay any stamp duty.
3. Both involve high degree of leverage which can magnify your returns but can amplify losses too.
But if you look closer, there are some important differences you should take note of.
1. Deal Size
With spread betting, you bet an amount of money per point, say $5 on whether a market will go “Up” or “Down”.
However, with CFDs, you “Buy” and “Sell” contracts that represent an amount per point in the underlying market.
A CFD broker may offer $10 per 1 standard FTSE contract. The amount could be higher or lower. The amount was dictated upon the requirement or offer of the broker.
2. Tax
Spread betting profits are currently free of capital gains tax but CFDs are liable. While this may seem a major drawback, any losses can be offset against future profits for tax purposes, which makes CFDs good for hedging.
3. Expiry Times
Spread bets tend to operate on a fixed time scale, anything from a day to several months while CFDs generally has no expiry dates and you can apply roll over depending on the platform.
4. DMA (Direct Market Access)
Direct market access means that you can trade directly into the order books of major stock exchanges or forex providers.
Some CFD brokers offer shares CFDs and forex CFDs into their platform. However, no brokers allow DMA’s for spread betting.
5. Share Dealing
In most cases, different brokers allow you trading shares and forex CFDs at the market price and you are required to pay a commission on all transactions.
However, with spread betting, all charges are included in the spread.
So which is best for you?
Well, if you want tax free profits, full control over the size of your deal or you want to deal shares in small sizes without having to pay a minimum commission, then spread betting could be for you.
However, if you want DMA on shares and forex, a product that feels similar to trading in the underlying market or an efficient way to hedge your portfolio then CFD is the best option.
Whatever margined product you choose, leading international forex broker AvaTrade gives you the opportunity to access these forms of financial derivatives trading.
AvaTrade trading platform
Below are the advantages of signing-up with this trusted brokerage:
• Licensed by trusted regulators including the Central Bank of Ireland, ASIC, FSCA, FSA and MiFiD
• Access to various financial instruments including FX pairs, indices, equities & bonds
• Various trading platforms available
• Competitive spreads offering
• Get in touch with a personal account manager
Risk Warning: Trading forex and/or CFDs involves significant risk of loss. CFDs are leveraged products and it is possible to lose more than your initial investment.
Below are the advantages of signing-up with this trusted brokerage:
• Licensed by trusted regulators including the Central Bank of Ireland, ASIC, FSCA, FSA and MiFiD
• Access to various financial instruments including FX pairs, indices, equities & bonds
• Various trading platforms available
• Competitive spreads offering
• Get in touch with a personal account manager
