What’s the Difference Between Spread Betting and CFDs?

If you’re new to the financial or forex markets, it can be difficult to identify the best investment vehicles to optimise your long-term profitability.

Two of the most popular investment vehicles are spread betting and contracts for difference (CFDs), which boast a number of similarities to one another and fundamentally enable you to achieve profitability even in a depreciating market.

In this post, we’ll compare and contrast spread betting and CFDs whilst asking which option is right for you.

Spread Betting vs. CFDs - The Key Similarities

In simple terms, spread betting essentially involves wagering on whether the value of a particular asset will go long or shot within a predetermined period.

Conversely, CFDs enables two parties to mutually agree to exchange the difference between the opening and closing price of a specific contract.

You can once again go long or short through CFD trading, whilst these entities are also similar in that they enable you to trade freely without ever assuming ownership of the underlying asset class. This allows for far greater flexibility, as you can theoretically profit by hedging against a specified asset as its value declines.

Both spread betting and CFD trading vehicles are leveraged, which means that you’re able to access lucrative positions and margins with a relatively small deposit (with the difference subsequently borrowed from a reputable broker such as ATFX.

Whilst this offers you access to potentially increased profits, it can also cause you to lose more than you may be able to comfortably afford unless you leverage comprehensive risk-management features.

What are the Differences and Which Option is Right for You?

Despite the similarities between spread betting and CFD trading, there are some differences that may ultimately inform your decision making.

For example, whilst you don’t have to pay stamp duty on spread betting or CFD profits, the latter does require you to pay capital gains tax out of your earned income. In this respect, spread betting has a distinct edge, and it can certainly help you to make the most of your capital.

On the flipside, however, the fact that you pay this tax levy means that you can offset losses against other gains. This provides an additional layer of security for traders, and in this respect CFD trading may offer a better option for risk-averse investors.

Ultimately, both of these options offer genuine benefits to traders, whilst they also share a number of similar features. However, the basic tax and structural differences can help you to make a more informed decision that offers superior value from your own personal perspective.