Financial markets are risky because of the volatility of the market. CFD and Spread betting both are financial derivatives to trade in the market and gain profits. They are known as a popular form of derivatives trading. Traders are free to choose trading instruments such as shares, currencies, commodities, indices, and many more.
For the UK residents, the income earned from spread betting is exempt from stamp duty and capital gains tax as well. These trading products are popular among both full-time and part-time traders.
What are Contracts for Difference (CFDs)?
Contracts for difference (CFDs) are complex instruments in which traders just have to speculate between the opening and closing prices. Physical delivery of goods does not take place rather the difference between prices are settled in cash.
Advanced trading strategies are required for CFD trading. Generally, they are carried out for the short term. Traders can make quick profits with CFD trading.
Working of CFDs
When a trader sees any change in an asset’s future prices, he enters into CFD trading. Two parties are involved in trading CFDs. There is no physical exchange of goods, but a contract is made to execute the transactions on a predetermined date.
The opening price of the asset is recorded in the contract. The same is settled in cash according to the closing price of an asset on the execution date. Traders who expect prices to rise buy contracts for difference, and traders who expect a downward trend in prices sell the opening position.
There is a high risk of losing money while trading CFDs. This is because CFDs are complex instruments, and market prices can fluctuate real quick according to circumstances. Short selling of instruments is also carried out with CFD trading.
What Is Spread Betting?
Spread betting is the process of speculating on the price movement of a security. Traders do not have to own the asset. They have to bet on the bid and ask prices. A company quotes two costs: the bid and another is the ask prices, also known as the spread.
Investors can bet on the situation that whether the price of respective security will be higher than the ask or lower than the bid price. They do not have to own the security, just speculate on the price movement.
Working of Spread Bets
Spread betting allows traders to speculate on the change of price of the trading instruments. Various types of instruments are available for betting, such as shares, indices, commodities, forex (FX), and several others.
In simple terms, it can be said that traders bet on the rise or fall of the market. Some traders also do spread betting for tax purposes because there is no tax on spread betting. High leverage is available for spread betting, so traders need to deposit fewer funds.
For example, if the contract is $50,000, traders need to deposit only 10% of the $5,000 for the trade. Traders can place spread bets in both types of markets are the bear and bull markets.
Differences and Similarities Between CFD and Spread betting
There are a few key points of similarity and difference between CFD and Spread betting. The main difference is how they are treated for tax purposes. Here are the differences between CFD and Spread betting:
- Spread Betting – It is not like stock trading. Spread betting is free from capital gains tax and stamp duty for traders in the UK. Some traders also trade it because of this benefit. The profit earned on bets is completely theirs’, and there is no need to pay any taxes to the government.
- CFD Trading – Traders do not need to pay stamp duty on CFD trading, but it is not free from capital gains tax. It is a benefit for which traders perform CFD trading. But CFDs require advanced trading strategies to earn profits.
- Spread Betting – Traders have the option to go long as well as short with a spread bet. If traders expect a rise in market prices, they can go long, and if they expect to fall in prices, they can go short with the same trading instruments. It is up to traders whether to go for long or short selling.
- CFD Trading – Investors also have the option to opt for short selling or go long in CFD trading. They can choose according to the market performance based on their prediction. Traders can open a long position based on the rising trend and a short position based on the falling market trend.
- Spread Betting – Spreads may vary according to the trading instrument of the broker that you opt for. Traders need to pay spreads and holding costs for spread betting contracts. These are two types of costs that are associated with spread betting.
- CFD Trading – Holding cost may apply to CFD trading, but traders do not need to pay spread charges. The holding cost may vary according to the time period the contract is being held by a trader.
CFD and Spread betting: Who can Trade?
- Spread Betting – Traders who are residing in the UK or Ireland have access to spread betting. Other traders cannot perform spread betting as they do not have access to place spread bets.
- CFD Trading – Traders all around the globe can participate in CFD trading. But traders who do not have enough experience lose money when trading CFDs.
- Spread Betting – Generally, there are no commission charges on CFD trading, but still, it may depend on the broker with which you are trading. Customers need to study the charges of brokers before selecting one for trading.
- CFD Trading – Traders need to pay commission as well as spread charges on CFD trading. The percentage of the commission may depend on the trading instruments. Spread charges also depend on trading instruments.
CFD and Spread betting: Trading Platform
- Spread Betting – For spread betting, traders need a broker because it is required to be conducted over the counter. That is why an online broker is required to execute the transaction successfully.
- CFD Trading – Traders can even make CFD contracts on their own. They do not need an online broker to execute the contract. It is made on the mutual agreement of both the parties to enter into the contract.
Pros of CFD and Spread betting
Trading CFD and Spread betting has always been a demanded trading instrument for every trader. Traders who have the ability of risk management and can afford a high risk of losing money enter into these trades. The amount of profit that can be earned from CFD and Spread betting is also higher.
The pros of CFD and Spread betting are discussed below. There are several trading benefits of CFD trading, spread betting and other similar trading products. The advantages are:
- Traders need to pay less taxes as the capital gains tax is not charged with spread betting, but you have to pay CFDs spread and capital gain tax.
- Brokers also offer less spread charges, and some of them are also providing commission-free trading so that investors can earn more.
- Higher profits can be earned within a short duration of time. You will need advanced risk management strategies to avoid the risk of losing money.
- Traders can even go short or long as per the conditions to gain more profits from the financial markets in which they are trading.
- You will get access to all the financial markets across the globe and the trading instrument you find most suitable for trading.
Select Among Top Brokers
Traders need to choose a broker among the top brokers that are operating globally. We have got a couple of brokers that can suit your trading requirement. The brokers are:
TradeATF is a regulated broker that is offering CFD and spread betting. The broker is providing commission-free trading to its customers. You have a wide variety of assets from the underlying market. 1:500 is the leverage being offered by the broker.
Trade with stock index, commodities, indices, and many more with this broker. You will also get customer support that is working 24 hours a day and 5 days a week. The trading platform is MetaTrader 4 that is also a user-friendly platform.
Traders can access the global financial markets to place trades. CFD and spread betting is easy with a reliable broker. The broker also offers a vast range of educational material and market research tools. You will get one-touch access to all the leading markets.
Data of an investor is also safe with the broker as the platform is protected by multiple firewalls and Secure Sockets Layer (SSL). Apart from CFD trading, you can also invest directly in shares, forex (FX), commodities, and more.
ABInvesting is a trusted broker as it is regulated and also offers CFD trading. The broker is providing zero commission trading along with lower spread charges. Trades can opt among a wide range of trading instruments for trading. The broker is offering high leverage of 1:500.
Customers get 24/5 customer support to solve their queries. The broker operates on the MetaTrader 4 trading platform that can also be accessed from your web browser, mobile app, or desktop. Also, get access to educational material, analytical tools and trading signals offered by the broker.
The data and transaction history of a trader is also secured with the broker as the trading platform is protected and fully encrypted. Get a free demo account from the broker and experience the financial market without risking your funds.
Start CFD trading and spread betting with TradedWell. Enjoy zero commission trading with this broker, rat,her and spread charges depending on the type of trading asset you are trading with. You can trade in CFDs of shares, commodities, indices and more to choose from.
Take advantage of high leverage in trading that is 1:500. Traders can trade among different financial markets across the globe. The broker offers a wide range of educational materials and market analysis tools to make your trade decisions easier.
The trading platform is MetaTrader 4 that is also a user-friendly trading platform. The trading platform is WebTrader and Mobile App. More than 300 CFD instruments are offered by the broker to choose from.
Investors’ data are fully protected on the platform as it is completely encrypted so that hackers cannot retrieve the data or transaction history. Open a free demo account with this broker and start trading with fake funds provided by the broker.
Benefits of trading with these brokers:
- A free demo account for trading is available, which means traders do not need to risk their funds in the market for experiencing the same.
- There is no need to pay commission on trades, and the spread charges are also lower than other brokers or services providers.
- A wide range of trading instruments, plus educational material to enhance your knowledge and trading signals for better decision making.
- Dedicated customer service for every trader. If a trader faces any issue, then it is resolved as soon as possible.
The Bottom Line
CFD and Spread betting both are profitable for a trader, and you can fetch high profits from spread bets and trading CFDs. You have to choose a trading instrument in which you want to trade and a trustable broker to execute your transactions in the market. The trading products are riskier as there is a high risk of losing money in the market. Traders need to manage the risks to get the best results.