Spread Betting Review

CFD VS. SPREAD BETTING PART 2

It is true that CFDs and spread bets are both quickly becoming the favored trading method for most individual investors, but there are some key differences as well.

Spread Betting Advantages

Since CFDs are a margined product and have no expiration date, funding charges will be accrued whenever buy positions are held overnight (but not for positions closed intraday). This differs from spread betting, which are opened with a premium charged when the position is opened (the spread). Spread bets typically trade above the price of the underlying share (futures contracts trade similar to this) and are based upon their fair market values, with take factors such as dividend gains and funding charges into consideration.

Another advantage of spread betting is that there is no risk of currency loss, if the trades are properly structured. If, for example, a UK trader establishes positions (in any asset market) using the British Pound your total position results (profits and losses) will be quoted in British Pounds and this will help to protect against potential losses from unrelated currency fluctuations. Most broker providers allow traders to set their accounts in a variety of different base currencies, so traders from all across the globe can take advantage of these spread betting benefits.

CFD & Spread Betting Differences

Conversely, CFD positions tend to be quoted in the currency of the underlying market. So, for example, positions taken in Oil or Gold will be quoted in US Dollars (because those assets are priced in the US currency). Similarly, if you were to trade shares in the DAX equity market, your position would be quoted in Euros, and your initial outlay of British Pounds will need to be converted at the beginning and of the position (and profits and losses will be adjusted to reflect this currency conversion).

Tax differences

When trading CFDs, traders are required to make tax payments (based on the marginal tax rate for investors). Spread bets, however, are free of taxation obligations and many traders base their decisions to enter into spread betting based on this cost advantage. But one aspect that must be remembered is that losses incurred through spread bets cannot be written-off for tax purposes, while CFD losses can be written-off on your yearly tax bill. For this reason, CFDs might be more attractive for new investors (as they are most likely to incur losses at this stage of a trading career).

Bid/Offer spreads

Finally, it should always be remembered that the biggest factor to be considered when spread betting is the spread price between the bid and offer quotes. Spread betting brokers make two-way prices available at a set rate while CFD brokers enable traders to place their orders inside the bid/offer spread (which is an increased level of trade flexibility). This bid/offer spread is the biggest cost for individual traders, and this is the reason major hedge funds tend to utilize CFDs rather than spread bets.

Financial markets access

Market access is important for traders looking to exit positions, and access to financial markets with deeper liquidity and when dealing with illiquid markets, there is always the possibility that you will not be able to exit a position at your preferred time (or price) as there must be a willing market participant willing to take the other side of the position. This counterparty knows the traders position orders and has the ability to quote prices that are suited more for the broker rather than the individual trader. For this reason, some find CFD trading better suited to their individual trading strategies.

Both CFDs and spread betting have become increasingly popular in the modern trading environment but it should be understood that there are some subtle differences that are better tailored for different investment needs and trading styles. Position time frames, tax liabilities and order execution are some of the main issues that need to be considered before opening a trading account, so these topics must be thoroughly researched before real money is put at risk.

 

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