Spread Betting vs CFDs
Investing in financial markets can truly lead to substantial rewards. However, investors don’t always have enough capital to be able to make the most of their investments and secure opulent returns.
That’s why some investors use leveraged products to gain a significant market exposure without necessarily having to secure a large initial deposit. Spread betting and contract for difference (CFD) are two of the most popular types of leveraged products in the UK.
Both of these leveraged products have a plethora of benefits, yet each of them have quite unique advantages. So, in order to be able to accurately assess which option will suit you best, you must first ensure you learn more about them.
Why Spread Betting?
Spread betting offers a chance to earn profits you can keep in their entirety as they are exempt from capital gains tax. Furthermore, investors that opt for spread betting will also be free of any commissions as well as stamp duty.
What’s more, spread betting enables you to place investments in your chosen currency, which will give you greater control over currency exposure. Another advantage of spread betting is the fact that it allows you to make deals on both rising and falling markets, and it also gains you access to over 17,000 markets – including forex, shares, commodities and more. Spread betting also leaves room for both long and short investments, as you will be betting on the direction in which the asset’s price will move, and not purchasing the asset itself.
Finally, spread betting allows for 24-hour dealing, which many investors find to be more than appealing.
Why trade CFDs?
With CFDs, any advanced trader can gain direct market access, or DMA for short. DMA enables you to see all the available bid and offer prices, so that you can choose the market prices you wish to trade at, instead of having to trade at prices determined by others.
Moreover, CFD allows you to offset your losses against profits for tax purposes, which can come in extremely handy. CFDs also enable dealing on both rising and falling markets, again without any stamp duty required. Just like spread betting, CFDs also enable 24-hour dealing and use the prices on the underlying market.
Spread betting vs CFDs: Key Differences
The main difference between spread betting and CFDs lies in the way they are being taxed. As mentioned earlier, while profits from spread bets are completely capital gain tax free, profits from CFDs are usually offset against losses for tax purposes. And due to the fact that you don’t actually take ownership of any underlying assets, both of these options are stamp duty free.
Next, while you can really go both short and long with both of these products, there are some differences you can expect:
– Spread betting – here, the amount of money you stake will depend on the point of price movement in the underlying asset. So, if you go long with $20 per point of movement, you will either profit $200 or lose $200, depending on if the prices rose or fell by 10 points.
– CFDs – here, the difference in prices from the point at which the contract is opened to when it is closed will be exchanged. What this means is that if you were to buy 30 share CFDs assuming that the prices will rise, you can expect to profit $300 minus the commission fees if the prices rise by 10 points. However, if the prices were to fall, you’d end up losing $300.
Another common difference is that spread bets have a fixed expiration date, while CFDs don’t really expire, unless we’re talking about futures.
Since both CFDs and spread bets are leveraged derivatives, they do enable you to receive a full market exposure for the initial deposit. However, while this can significantly boost your potential profits it can also easily increase your potential losses. So, it’s of the utmost importance to manage your risk before you decide to open a position with either spread bets or CFDs.
So, Which One is Better?
If you’re still unsure of which of these two options is a better choice for you, you really need to consider the advantages and disadvantages of both before you make your final decision.
An experienced trader can significantly benefit from both of these options. But if you’re not yet well versed in the world of trading, choosing either of them can feel like a real gamble.
In the world of finance, a number of instruments allow investors to trade in products they need not actually own. The popularity of such products has increased in the last decade following the advent of the global financial crisis during which the markets saw a free fall and investors lost trillions of dollars across asset classes. Further, the rise of the internet and innovations in financial technology increased the ease of trading among investors.
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