As a trader, you’ve got a lot to think about besides the financial instrument you’re trading. The financial markets are a hive of activity, with shares, foreign exchange (forex), commodities, indices, and crypto trading available. But it’s not just the different asset classes to consider, it’s the types of trades you wish to make. Many new traders are blithely unaware that profitable opportunities exist even when the prices of assets decline. But if you simply traded stocks in the conventional way, it would be impossible to realise these benefits.
It’s important to understand the market dynamics, including market volatility, liquidity, and trends, to identify profitable trading opportunities.
For example, did you know that you can trade a large position with just a fraction of the total trade amount? It’s called leverage. And while leverage must be handled with extreme caution, it can serve to maximize profits when trades are favourable to you. In traditional trading circles, you are required to front the total amount of the trade. With leveraged financial instruments, you can magnify your trading power based on the amount of leverage available. But before we explore spread betting vs CFD trading, it’s important to introduce derivatives, speculation, and profit potential.
Spread Betting & CFD Trading
Back in high school, you learned about derivatives. In the context of trading, derivatives can be used to take positions on the price movements of various assets, such as stocks, forex, commodities, and indices. For example, futures contracts are a type of derivative that allow traders to buy or sell an asset at a specific price and date in the future. Options contracts are another type of derivative that give traders the right, but not the obligation, to buy or sell an asset at a specific price and date in the future.
Spread Betting and CFDs, which we discussed above, are also specific types of derivatives. Both allow traders to speculate on the direction of an asset’s price without owning the actual asset. In the case of Spread Betting, the trader (you) is placing a bet on whether the price of the asset will rise or fall, while with CFDs, the trader is entering into a contract to buy or sell the asset (the CFD contract) at the current price with the aim of profiting from the difference in price at a later date.
These are two popular trading options in the UK market. Importantly, spread betting is a type of financial derivative that allows you to speculate on the direction of an asset’s price without owning the actual asset. And we know that CFDs (Contracts for Difference) enable traders to profit from the price difference between the opening and closing prices of an asset. Both Spread Betting and CFDs allow traders to use leverage, which magnifies the potential gains & losses. Start small as a new trader, and practice in demo mode before trading for real.
Differences Between Spread Betting & CFDs
Spread Betting can be an attractive option for traders because it offers several benefits, such as zero taxes on capital gains, zero commission (only the trading platform’s spread), and the ability to bet in your preferred currency, giving you better currency exposure control. You can deal on both rising & falling markets, and leverage is available to magnify your exposure in the markets. Additionally, there is zero stamp duty, and around-the-clock dealing is available. Spread Betting also uses prices rooted in the markets, providing transparency and accuracy in pricing.
Similarly, CFD Trading offers DMA on various shares and allows losses to be offset with profits for taxation purposes, making it an attractive option for traders looking to manage their tax liability. As with Spread Betting, CFD Trading allows traders to deal on both rising & falling markets, and leverage is available to magnify your exposure in markets. Additionally, there is zero stamp duty, and around-the-clock dealing is available. Like Spread Betting, CFD Trading uses prices formulated on the financial markets, offering transparency and accuracy in pricing.
The short & sweet of it is that both Spread Betting & CFD Trading offer leveraged access to financial markets and allow traders to deal on rising and falling markets. They also offer no stamp duty and 24-hour dealing, with prices premised on market prices. Spread Betting has the added advantage of no taxes on capital gains* and greater currency exposure control, while CFD Trading offers direct market access otherwise known as DMA, on shares and allows losses to be counterbalanced against profits for tax reasons. Traders should consider their individual circumstances and preferences when choosing between these two unique financial instruments.
* The tax laws are variable and influenced by individual circumstances, and they are subject to changes over time. It’s worth noting that tax laws may differ from one jurisdiction to another, and this statement holds true outside the UK.