How CFD Trading and Spread Betting Are Different?

Both CFD trading and spread betting appear to be margin-based products. At first sight, they have similar economic values and benefits for traders. Both can be good options when investing in shares, commodities, currencies, and indices.

At the same time, the two approaches are quite different although they are both quite popular with investors of different levels. In this article, we will highlight the key points of how CFD trading is different from spread betting, as well as what benefits each product can deliver out of the box.

CFD vs Spread Betting

Generally, CFD trading and spread betting are considered by newbies as something similar. Often, traders compare them directly. They do have several similarities like both products are highly leveraged. Besides, these two approaches can be used to gain significant returns from incremental price movements.

While the nature of the two concepts looks similar, they have some key differences. For example, experienced traders assume spread betting is more of a gambling tactic, as it is a very stigma attached. At the same time, CFD trading relies on the underlying price basis. Additionally, CFDs are seen as part of the market and refer to the type of financial transactions in a bigger way than spread betting.

Key Spread Betting Features

To realize how spread betting is different from CFD trading, we need to look under the product’s hood to highlight the key features and advantages it can deliver to individual traders:

• Zero Commissions. If you open a spread betting position, you are not charged any fees or commissions. The only cost traders need to cover is wrapped in a spread (it represents the portion of commission) that is not linked to the size of the position. What’s more, it is not related to the final gain.
• Tax Efficiency. Spread betting comes with enhanced tax efficiency compared to CFD trading. However, this will work only in some specific countries, like the UK, for example. If you want to benefit from the product, you need to look for regions that offer tax-free betting opportunities.
• Trade In the Currency of Your Choice. Spread betting will take place with the use of your base currency. It can be USD, GBP, EUR, and so on. It will determine your trading activity. All transactions you make will be placed as bets in the underlying currency. All your losses and gains will be in the same currency.

Key CFD Trading Features

As stated earlier, spread betting is more of gambling. CFD trading relies more on price data and market information. Additionally, it comes with the following advantages:

• Lower Spreads. The CFD market usually comes with tighter spreads compared to its rival concept. This fact handicaps the fact that spread betting comes with zero commission. To generate a level of return compared with the one for CFD, traders have to maintain long positions for a longer timeframe and short positions within a shorter time frame. Otherwise, it will be impossible to generate the same return level considering the width between the buy and sell prices. As a result, CFD is a better option when it comes to finding a minimal trading opportunity.
• Hedging. Hedging works better with contracts for difference. It is mainly thanks to DMA (Direct Market Access). It allows investors to shorten specific assets (for example, shares) to protect them during economic uncertainty to pay only taxes on the gains they make.
• Enhanced Price Transparency. The nature of CFD trading is to monitor the futures. Besides, traders can track underlying markets directly. This fact makes it simpler for them to understand where the CFD price comes from and how it moves. Of course, it does not guarantee accurate forecasts. However, it ensures more transparency compared to spread betting where investors generally try to guess.

The Bottom Line

If we compare CFD trading and spread betting, we will definitely see some obvious similarities. Generally, both approaches rely on the same technology. Additionally, traders can use any of these products to trade on various markets depending on the preferred asset. However, the differences are quite obvious.

CFD trading does not have an expiration date. If you open and close positions on the same day, you do not have to pay interest charges. CFDs provide short positions featuring an interest rebate. At the same time, spread betting has an expiration date. When the contract expires, the position is automatically closed.

Another difference between the two approaches is the way users place their trades. Generally, CFD investors trade a specific number of assets like in conventional stock trading. Oppositely, spread betting followers bet a specific sum on one point from any of the underlying markets.

Last but not least, spread betting is a tax-free approach while CFD is eligible for capital gains tax. In other words, if you lose when spread betting, the sum will not be deducted from your taxes. Instead, when you lose while trading CFDs, the amount can be offset by the gain you can generate during future trades

CFD trading looks like a safer and more transparent way, as it is still the financial part of the market. Traders know where the price comes from while spread betting is more like a chance to guess.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.