CFD Trading VS Spread Betting

November 2, 2015

If your residence is outside of the US you have a variety of retail derivative markets to trade. The 2 most popular options for Forex and indices trading are Contracts for Difference (CFDs) and Spread Bets. Though CFD and Spread Betting brokers operate very much the same way, there are some key differences.

 

What are CFDs?

 

CFDs are an agreement (or contract) between 2 parties (usually a broker and a client) that allow buying and selling of a financial product. These products are usually currencies (Forex), indices, commodities and stocks. CFDs are a derivative, meaning that they are not traded on an exchange and are usually a product that mirrors the price of an underlying asset. For example, purchasing a CFD contract of Barclays will not result in you owning any Barclays shares. The CFD market of Barclays shares will mirror that of the actual share price but will not involve you owning any shares in Barclays. The contract is simply between you and the broker.

 

What is Spread Betting?

 

Spread betting also allows a brokerage client to trade Forex, indices, commodities and stocks. Spread bets are also a financial derivative and allow buyers and sellers to speculate price movement through betting.

 

 

So, what are the differences between CFD trading and Spread Betting?

 

The biggest and main difference between CFDs and Spread Bets are that CFDs are considered speculative trading products, spread bets are considered gambling. Though both derivatives are traded very similarly, one is classified as gambling and one is not. Because of this difference in classification, the following apply...

 

Tax (if in the UK)

 

CFDs are liable for Capital Gains Tax. Spread betting is tax-free and any gains or losses are not to be accounted for. If spread betting becomes your main income then your profits will be liable for income tax. To learn more about UK tax on Forex trading profits, please read my UK tax on Forex trading post.

 

Pricing

 

CFD prices are usually quoted as per the underlying asset. Spread bets are usually quoted in point values.

 

Position Sizing

 

CFD contracts usually match the contract size of the underlying asset, for example 1 CFD contract of the UK100 will match the value of 1 futures contract of the FTSE. Spread betting allows betting an amount per point, which provides greater flexibility.

 

Guaranteed Stops

 

Guaranteed stop losses are usually not offered by CFD providers. Spread Betting brokers usually offer guaranteed stops, these do incur a premium charge though and are not free.

 

Conclusion

 

Spread betting allows you to earn tax free profits (if a secondary income) and allows you to limit risk through using guaranteed stop losses. For these reasons many choose spread betting over CFD trading. If trading becomes your main source of income, CFD trading can be more cost effective - in the UK Capital Gains Tax has a lower tax rate than income tax.

Either way, CFD trading and Spread Betting allow traders to profit from the financial markets using simple trading platforms and at a minimal cost.

 

If you have found this post interesting, I suggest watching Does my Broker Trade Against Me?!

 

 

 

Please reload

Subscribe for Free Updates (includes mailing list)

  • Grey YouTube Icon
  • Grey Instagram Icon
  • Grey Facebook Icon
  • Grey LinkedIn Icon
  • Grey Twitter Icon
  • Grey G+ Icon

© 2015-2019 love-the-pips

DISCLAIMER

 

*There is a very high degree of risk involved in trading. Past results are not indicative of future returns. Samuel Morton, love-the-pips.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for Forex trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information.You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of Samuel Morton and love-the-pips.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading Forex, Options on Forex, and any retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Samuel Morton and love-the-pips.com is not an investment advisory service, is not an investment adviser, and does not provide personalised financial advice or act as a financial adviser. love-the-pips.com exists for educational purposes only, and the materials and information continued herein are for general informational purposes only. None of the information provided in the website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, recommendation or sponsorship of any company, security, or fund. The information on the website should not be relied upon for purposes of transacting securities or other investments. You hereby understand and agree that Samuel Morton and love-the-pips.com does not offer or provide tax, legal or investment advice and that you are responsible for consulting tax, legal, or financial professionals before acting on any information provided herein.

*All trading products and services are non-refundable.  It is hardly fair to process refunds just because you change your mind after receiving materials and the education. Just as Amazon.com and iTunes, we do not offer refunds for digital products, there are NO refunds on any digital products offered on this site. Past results are not a reflection of future gains. We strongly advise that you risk no more than 1% capital per signal provided. We cannot be held responsible for any technical or other difficulties that may result in signals not received or followed. Our Mentor Program is non-refundable upon the start of the first training session. Our time is priced at £250.00 per hour, the mentor program offers 2 paid hours with the remaining program free of charge. Read our main disclaimer a. Our Advanced Price Action Course is non-refundable once the purchaser has logged-in.

lovethepips.com/forexcfdsignals is dedicated to learning profitable Forex price action trading