Spread betting is basically betting on the direction of shares. Companies that offer spread betting facilities will offer a ‘buy’ and a ‘sell’ price, each on either side of the current price of the underlying instrument. The difference between the ‘buy’ and the ‘sell’ price is the spread. A CFD (Contract for Difference), on the other hand, is an agreement between two parties to exchange the difference between the opening and closing price of a contract or the underlying asset. Both spread betting and CFD trading allow you to trade on a wide range of markets across the globe, all from a single account. This article aims to highlight and compare the salient features of CFD trading and spread betting.
· No stamp duty: There is absolutely any stamp duty payable on both spread betting and CFD trading. Compared to the conventional trading of stocks, bonds and commodities, this is a huge advantage in terms of saving money.
· Capital gains tax: You don’t have to shell out capital gains tax when you engage in spread betting. But you will have to pay capital gains tax when you trade CFDs.
· Trading on margin: Both spread betting and CFD trading allow you to trade on margin, which means you only have to pay a small percentage as deposit for your trades.
· Margin calls: In both spread betting and CFD trading, you will be called to deposit additional margin money if your trading positions turn out to be wrong.
· Stop losses: You can make use of the stop loss feature that CFD trading and spread betting companies offer. The ‘stop loss’ feature allows you to close your position automatically when your trading position turns out to be wrong and you start running losses.
· Commission: Spread betting does not have any separate commissions because the commissions are included in the spread. In CFD trading you will have to pay commission, which is usually 0.10% of the deal value.
· Long or short positions: Both CFD trading and spread betting allow you to take long and short positions. Going long means you think the price is going up. Going short means you think the price is going down.
· Expiry date: CFDs do not have an expiry date. There are expiry dates in spread betting positions, but rollovers are possible.
· Dividends: CFD holders receive dividends, but spread betters do not receive any.
· Leverage: Both CFD trading and spread betting allow you to trade on leverage, which means you can bet more than the capital you have in hand. While leverage is a great tool to magnify returns, excessive leverage may clear your account and even lead to bankruptcy.