November 30, 2020

CFD Trading and Spread Betting: Which is the better choice?

Getting into different financial investment markets is one of the smartest decisions you have ever made in your life. There is no question to that at all so that the next question would have to be which form of trading would you want to get into. We are sure you have probably thought of getting into CFD Trading as this is the most popular choice but what about Spread betting? As we go along, we talk about what each financial market is all about and its advantages and disadvantages

Contracts for difference

Simply put, CFDs or Contract for Difference is a financial contract between you as trader and your broker to transact an exchange on the difference between an opening and closing price of a chosen asset. A lot of traders get into this for the purpose of trading without necessarily owning the assets as this is more of an agreement on the difference in prices. Why do most traders pick CFDs? It is because they do get the chance to trade everything and anything with a price that is verifiable such as commodities, currencies indices and shares.

Advantages:

  • Wide range of markets can be traded
  • Low costs to enter CFD trading
  • Trader do not need to own the assets physically
  • CFDs are not traded from a central exchange and are over the counter, meaning it is traded between two parties giving flexible and innovative options for brokers in the market when they strade assets like Cryptocurrencies.
  • No stamp duty needed on CFD share

Disadvantages:

  • Even if you are not trading currencies, CFDs can expose traders to risks
  • There are some leverages that are underlying in an asset and most traders do not like this
  • No voting rights for you since you do not actually own shares from companies
  • Highly likely these are taxable to you.
  • Not available in certain countries

Spread Betting

A spread bet is a CFD concealed as a bet for tax related concerns. As financial spread betting is available in countries like Ireland and the UK, Profits are tax-free. With Spread betting, the traders specify an amount they would want to bet and that bet is made on an underlying asset.

The risk you get from CFDs is not present in this trading as this is done under the accounts base currency. As the price of the currency pair moves in a direction you intend, you will earn profit from your stake multiplied by the number of points your pair has moved in your favor.

Advantages:

  • No gains taxes for traders in Ireland and the UK
  • There is no base currency risk Unlike CFDs,
  • A wide array of available markets can be traded
  • Just like CFDs, there is low cost
  • No stamp duty on company share spread bets.

Disadvantages:

  • Just like CFDS, leverage becomes an underlying exposure you need to take on.
  • Not voting rights since you do not actually own the assets in this form of trading.
  • Not available in some countries because some treat CFDs as illegal. It is also not allowed in certain countries due to the fact that it is a bet
  • Losses are likely to not be tax deductible so FSBs are not that useful when hedging.