While viewed as an option by an ever-growing number of people, trading is a challenging task. To venture into the trading ecosystem, whether you’d like to get involved in technical, swing, intraday, derivative, leverage, or any other type of trading, you must carry out considerable research. Make sure you understand the intricacies of the trading world and be prepared to deal with a significant amount of risk. If you’re not comfortable with price fluctuations or volatility, it might be best to reconsider trading.
One of the first things you’ll learn in the trading world is that you won’t always be able to access the capital necessary for substantial returns. As such, you can get the opportunity for significant market exposure via the usage of leveraged products. In the UK, two options are particularly popular: contracts for difference and spread betting. They are fundamental for equity, index, and forex markets. And while their use cases are similar and share many of the same benefits, each has its unique advantages. But is there one that’s better than the other, or does it depend on the particularities of your trading profile?
Contracts for difference, more commonly referred to as CFDs, are derivative contracts between financial institutions and individual investors. This contract allows you to take a position on the future of an asset for its value. This is similar to spread betting, which allows investors to place money on whether they believe market values will rise or fall. The differences between the opening and closing prices are cash-settled. While there’s no delivery of either physical goods or securities with CFDs, the value itself is transferable by force.
Don’t mistake CFDs for future contracts. While they permit traders to deal in the price movements of futures, the similarities stop there. Contracts for difference don’t have expiration dates or preset values, but they trade like other securities, based on buy and sell prices.
Spread betting is a type of leverage that allows traders to speculate on the movements of several financial instruments, including fixed-income securities, forex, and stocks. Since the speculation is tax and commission-free, you can speculate during both bull and bear markets. You don’t have to worry. You’ll be hindered in your trading process depending on the strength of the current markets, which is excellent news considering 2022 has been a bearish year for investors. And since the market winter doesn’t show signs of letting up anytime soon, looking into your options is a necessity.
Spread betting works by enabling you to place a bet on whether you believe a market is set to expand or fall from the time your bet is accepted. You have the opportunity to choose how much risk you’re willing to take on this bet. And much like in the case of stock trades, you can mitigate risks by using stop loss or getting profit orders.
When you’re a trader, you want to get the best solutions for your endeavours, so you’ll, of course, wish to add the best solutions to your strategy. So, what are some of the main similarities between the two? The first and most obvious one is that both are leveraged derivatives. Both have value deriving from an asset and are well-known alternatives to direct investments. As the trader, you have no ownership of these holdings, and you aim to speculate on future prices. Opting for a short selling position enables you to gain the difference between the opening and closing values if the asset decreases in value over time.
If you’d like to do more in-depth research on spread betting vs CFD, you can click here to read more. You can get a better idea about the taxes and accessibility associated with the methods and the potential issues you must be aware of before setting out to commence a speculative trade. Both spread betting and CFDs come with additional commission fees and overnight costs. The use of leveraging during trading gives you increased exposure to financial markets.
Advantages and disadvantages
So, what are the pros and cons of each method? In the case of CFD, you trade on the margin, which provides higher leverage compared to traditional trading methods. The lower the margin requirement, the greater the potential returns for your trades. Generally speaking, there are fewer regulations associated with CFD when compared to other exchanges. The initial capital requirements can be pretty low, and you can start an account with as little as $1,000.
In the case of spread betting, one of the main advantages is that you can speculate on falling markets. Depending on your requirements, you can choose between several order types, including:
- Market orders: The trade is executed immediately at the current market price.
- Limit orders: You can trigger the trade for a specific price, whether above or below current values depending on your choice.
- Stop-entry orders: This method allows you to catch the momentum and enter a trade at a selected price.
However, there are also some disadvantages associated with the trade. In the case of CFD, leverage can also magnify your losses. Price volatility and fluctuations can lead to substantial differences in spread trading ventures. The industry is not highly regulated, which can make you wary of giving it a try. It is also not allowed in some countries and jurisdictions.
The disadvantages of spread betting, hedging isn’t guaranteed, and any losses you may incur are not tax deductible. You can only trade in the currency of your account, so all your transactions are in one currency, which can seem to limit some traders. There’s also no direct market access in spread betting, and there’s no model for corporate accounts.
Ultimately, the choice is up to you. Before deciding which option works best for you, make sure you have done your research and understand all the potential risks associated with trading and its methods.
Disclaimer: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Tax treatment depends on your circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.