Spread betting is one of the older tools out there that has been used as an off the books method of purchasing and trading shares. CFDs are a newer and more sophisticated tool. So how do they compare? We will discuss CFDs vs Spread betting here.
CFDs and spread betting are both financial derivatives that trace the value of an underlying asset such as a share. They are both traded over the counter, with the main counter party in the transaction being the market marker. They are both quick tools to be able to trade against the movement of an asset and both offer a wide variety of markets to choose from. Plus they are both traded on a margin, somewhere in the 5-20% range depending on your broker and the policies they enforce.
Some of the key differences between spread betting and contracts for difference include tax, pricing and commission. In many countries, spread betting is considered gambling and thus there is no tax imposed on profit and loss gained from ‘trading’ spread betting. This can be a valuable advantage as we all know how high taxes are in some countries. The pricing between the products also differs. The ‘spread’ (difference between the price of the derivative and the underlying asset) is much higher in spread betting. This means that there is more slippage in the price and you are not getting as good of a deal on your trades. Plus there is an added commission built into the price of the derivative. With CFDs the price is almost, if not identical to the underlying asset, meaning you have much more control over your trades and the prices you come in and go out at plus there is a commission charged on your trade (differs depending on your broker but usually around $10 for trades under $10,000 and 0.1% for trades over $10,000).
If you are trying to decide whether or not to take up CFD trading or Spread Betting it is important to consider these factors. Take a look at the different brokers and their pricing structure in your country and the options they offer. Speak with your accountant and find out the tax implications and you may find yourself on route for a profitable year.