Going hand in hand with the rise of CFDs, has been the increasing popularity of financial spread betting. Spread betting and CFDs are very close cousins but they are slightly different, with the most obvious example being that one is a bet and one is a trade. With a spread bet the customer is basically taking somebody else's price, no different to walking into a bookmaker who's chalked up a two-way price on the board. More people currently spread bet than trade CFDs and the key reason behind this is the issue of tax. At the moment a financial spread bet is literally seen by the Inland Revenue as a bet, meaning there is no tax payable on it, income tax or capital gains tax (40% on short term investment profits above the £7200 threshold). The non-payment of tax on spread bets is a huge benefit financially compared to other forms of financial tools. READ MORE ABOUT CONTRACTS FOR DIFFERENCE's HERE
You don't pay a commission, instead there is a slightly wider spread. For small trades (i.e. usually less than £2,000) this can actually work out cheaper than buying the actual shares through a broker. However, with larger trades you miss out on the advantage of the low "flat fee" commission available from stockbrokers and you miss out on the chance to buy/sell inside the quoted market bid/offer spread.
There is a low deposit to pay. Usually around 25% on small caps and this can be reduced with the use of a stop loss and can sometimes reduce your deposit to zero. Larger caps generally have a 10% deposit.
The price you buy and sell at will be slightly different from the market quoted price, but with shares it is always a reflection of the actual price quoted in the market. (The derivative's price will include an extra spread to account for interest on the position - remember you only pay a deposit for the shares, so this is fair enough) .
Unlike online share dealing, you do not get the "15 second confirmation". Instead, you must wait for the dealing system to check if the trade can be covered by buying/selling in the market (which they do not always do, by the way). The disadvantage of this is that if you are dealing in a fast moving stock, the price often moves before they can cover the trade and you have to start the process all over again, the share price might have risen 5% before you are able to actually buy the shares!
You must pay Capital Gains tax on your profits, but this can be an advantage to people using CFDs to hedge positions as they can offset any capital losses against their CGT liability.
All profits are free from tax.
It's my own thoughts from my experiences with IG Index, Cantor Index, Finspreads and Capital Spreads. I've have only recently started using CFDs
One of the main differences between spread betting and futures trading is that the bookmaker decides the prices to quote and each client trades with the bookmaker, not with another client. In futures markets, contract prices are determined to balance supply and demand between sellers and buyers. The exchange authorities guarantee that the contracts will be fulfilled but do not initiate buy or sell orders themselves. In general, spread betting is designed for private investors who can commit only small amounts of capital compared with companies which, by trading in large outlays, can secure more favourable terms by trading in futures.
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