Thanks to universal access to numerous online trading platforms, investors can now enjoy a wide range of options that can prove to be financially rewarding. Two very common vehicles are spread bets and contracts for difference (CFDs). Those who are new to the industry may not be clear in regards to the main differences between the two. Let us therefore take some time to compare and contrast spread bets and CFDs. We will also review the unique advantages of each as well as when a specific option may be the most appropriate.
Spread Betting Versus CFDs: The Technical Differences
Before we look into the reasons why an investor could choose one vehicle over the other, let us examine the key points of each. Some of the main characteristics of spread betting are:
- Spread bets provide a range of possible investment outcomes.
- There are expiration dates associated with spread bets.
- Stamp duty and capital gains tax will not have to be paid.
- Some of the key points in reference to contracts for difference are:
- CFDs are financial derivatives (prices derived from the underlying market as opposed to the market itself).
- There are no expiration dates associated with CFDs.
- While no stamp duty needs to be paid, the investor is responsible for capital gains tax.
Another important difference between these two is associated with how a deal is performed. Spread bets require the trader to choose the size of the holding in reference to the amount of capital invested during each movement of the asset. CFD trades are instead defined by the number of positions during a trading period. Please note that in the case of CFD trading, each position (contract) is given a discrete value.
When to Choose Each
Those who choose spread bets will do so for several reasons. They may be interested in enjoying tax-free profits. With spread betting, it can be slightly easier to manage the size of the trade. Spread bets are attractive to those who are keen on long-term positions within liquid markets such as the Forex sector. These can also be worthwhile for anyone hoping to minimise commissions at the end of a trade.
CFD traders are frequently interested in offsetting the loss-versus-profit ratio with the help of a tax deduction. Many professional and corporate accounts such as those offered through CMC Markets cater to these positions. Additionally, those who are experts within a certain market may choose CFDs as an addendum to standard shares.
There are also some similarities between these two financial vehicles. For instance, both can be used when trading on margin. CFDs and spread bets are able to utilise long and short positions depending upon underlying market conditions. Each employs underlying market prices to determine the value of a holding and both may be traded on a 24-hour basis.
So, it is clear to appreciate the similarities and differences between these two popular options. Please contact CMC Markets directly for further details or if you wish to open a live account