Spread Betting Or CFD Trading – Which Is Right For You?
Very often in the financial world, people trade on assets that they do not actually own. These financial instruments have exploded in popularity in recent decades, thanks in part to the rise of the internet and the increasing ease with which individuals can get involved in trading. Two of the most popular means of doing this are spread betting and CFD trading. There are pros and cons to each of these two methods, which will be covered in this article.
Spread betting involves essentially betting on whether the value of a particular stock, share, indices or commodity will go long or short. You don’t own the asset, so there are no taxes to pay on gains but neither can you offset losses against gains elsewhere. Most spread betting is leveraged, which means that you put down a small deposit but trade for a much larger value. It’s important to understand the risk involved in this, because it means that if your trade does not go the way you expect it to, you could end up losing a lot more money than you put down. It’s not unique to spread betting but it’s important to be aware of it. On the positive side of things, it does also allow you to multiply your gains quickly with some well placed trades.
CFD trading meanwhile stands for Contract For Difference, which means that two parties will agree to exchange the difference in the opening and closing price of a contract. You can once again go short or long on your trades, so for example if you decide to go short on a trade and the closing price ends up being lower than when you placed the trade, you can profit on the difference. Much like spread betting, you never actually own the underlying asset you are trading on but you buy CFD units instead. This allows for greater flexibility than traditional share ownership, because your trades are self contained and you are not stuck with unfavourable shares from bad trades.
Since you don’t actually own the underlying asset in either spread betting or CFD trading, you do not have to pay stamp duty on your trades. However, you do have to pay capital gains tax for CFD trading whereas you don’t for spread betting, so in terms of tax efficiency spread betting has the slight edge. The other major difference between the two is that spread betting has a fixed expiry date, whereas you can hold on to CFDs indefinitely except in some specific circumstances. Thus spread betting is more suitable for short term trades, whereas CFDs are better suited for longer term investments.
The pros and cons of spread betting.
The Pros of spread betting:
1) Shorter trade duration, so your profits or losses are realised sooner
2) No stamp duty or capital gains tax
3) Easy to control your stake
The cons of spread betting:
1) You own no underlying assets so your portfolio cannot appreciate in value
2) Losses can easily be magnified with leveraged trading
3) You cannot offset losses against other gains
The pros and cons of CFD trading.
The Pros of CFD Trading:
1) CFDs mirror those of the underlying asset, so if dividends are paid out on the underlying asset, you will get paid dividends on your CFD
2) No expiry date, so you can hold on to CFDs for as long as you feel necessary
3) You can offset losses against other gains
The cons of CFD trading:
1) Since you don’t actually own the underlying asset, you don’t receive any voting rights associated with the underlying stock
2) Interest is often charged on margin, so holding onto CFDs for too long can be expensive
3) You are charged capital gains tax on profits
Regulated Brokers for Spread Betting and CFD Trading
There are plenty of brokers for both spread betting and CFD trading, so if you are interested in getting started you will be spoilt for choice. It can be hard to know who to go with when you’re just starting out, so below are some brokers for both spread betting and CFD trading.
Trusted by more than 51,000 traders since entering the spread betting market over a decade ago, ETX Capital is one of the oldest and most trusted online brokers around today. They are regulated by the Financial Conduct Authority in the UK and provide one of the widest range of instruments at the lowest spreads available. They offer spread betting, CFD and binary option platforms to suit any trader. ETX Capital offer a customisable platform to show as much or as little technical information you want in a platform and currently offer a great £20 no deposit bonus sign up bonus.
If you want to find out more about ETX Capital, read our in-depth review of ETX Capital here.
eToro is a broker which sets itself apart from the competition by billing itself as a “social trading network”. This means that you can follow other people and copy their trades. This is somewhat like spread betting on a larger level, where you judge a person on their previous trades and decide whether their trades will be successful in the future or not. eToro is generally more of a passive means of investment, where you select certain investors to copy and let them make the trades. While you can become a Popular Investor yourself, which is what they call investors who get copied, it’s a slightly different means of trading than most brokers.
IronFX is a broker with several trading platforms to choose from, which allows them to support a wide range of platforms from Mac and PC, to mobile and tablet as well as web based trading platforms. This allows you to make trades from wherever you are and on almost any device you might have access to. This is very important, particularly for shorter term trades like spread betting. You can’t go wrong with IronFX for trading on the go.
CMC Markets is a broker with a pedigree name, supports both spread betting and CFD trading and allows you to trade across thousands of markets. It’s one of the biggest and best brokers available on the internet and is a great all around choice for online trading. It’s more traditional than eToro when it comes to investing, but if you trust your own trades above those of others then it’s a great choice.
Spread betting and CFD trading offer similar means of trading on underlying assets without owning them, but there are some significant differences between the two which you should consider carefully before starting any trades. Always be aware that your capital is at risk and losses can exceed deposits, never invest more than you are willing to loose.