Spread Betting vs CFDs

Introduction

Spread betting is maybe CFDs' closest relative in terms of investment products. They have a few essential technical and legal distinctions that must be drawn in order to better understand how each is utilized, but in practice, they serve the same purpose with only a few key differences.

While both are highly leveraged trading options, most investors consider them to be completely different, and there may be times where spread betting is better suited than CFDs, depending on the investment circumstances.

CFDs vs. Spread Betting: What's the Difference?

CFDs and spread betting are frequently compared because they share a number of essential characteristics, including the fact that they are both highly leveraged and, as a result, can return substantial sums from little market moves.

They may share certain practical parallels, but they also have significant variances. Spread betting carries a reputation for many professional traders, who regard it as little more than a form of gambling.

While this isn't strictly true, spread betting has nothing in common with underlying market prices, whereas CFDs are at least ostensibly exchanged on the basis of underlying prices.

While spread betting is considered an off-market transaction, CFDs are considered part of the market and are more of a financial transaction than spread betting. While there are certain differences in terms of functionality, both instruments are beneficial for investing in a variety of markets with high leveraged positions.

CFD Trading vs. Financial Spread Betting

Spread betting is formally regarded as a form of gambling. The profit is calculated by multiplying the significant difference between the market price at the end of the trade and the sell/buy price when you took the position by the per point stake amount you've set.

While spread betting takes a slightly different approach to trading than CFDs or, for example, stock speculation, it functions as a highly leveraged, extremely tax-efficient tool capable of producing returns comparable to CFDs. Your original investment is multiplied by one for each point movement in your favour, so a 10 point movement equals 10x your original stake.

The same is true on the other side of the coin, with losses being multiplied by an unlimited number of times depending on how far the position has moved since you joined the trade. Traders can make huge gains and losses with spread betting for a small amount of cash risked, with the added benefit of being tax-free in most circumstances.

While CFDs can provide traders with higher returns in some circumstances, it would be silly for a trader to dismiss spread betting as a viable means of achieving a profitable capital return.

Spread betting is a rapidly expanding field of financial trading, with estimates indicating that over 1 million trading accounts are presently active in the UK. And there's a compelling rationale for it. Spread betting is undoubtedly one of the easiest financial products to grasp in practise due to its visual simplicity.

However, the true benefits of spread betting go far beyond appearances; it's a viable technique to trade a variety of markets in a highly leveraged and cost-effective manner. One of the first important benefits is unfunded leverage, which is achievable since the leverage takes a somewhat different shape than, for instance, CFDs.

Instead of increasing the size of the position, the multiples effect, which multiplies stakes, is encoded into the fundamentals of the spread betting transaction.

Another important reason why traders choose spread betting as a trading strategy is that it is tax-free. Because it is protocol as a gambling activity by the tax authorities, you should expect to be relieved from Capital Gains Tax and Stamp Duty (although income tax will also be payable by those who earn their sole income from spread betting).

This is a big plus, especially for those doing larger individual transactions, because it can save you a lot of money on less tax-efficient investments.

Conclusion

When comparing the aspects of CFD trading and financial spread betting, one will note that there are more parallels than differences. It's true that they both employ the same technology, and they both have a wide choice of markets to choose from. Despite their commonalities, the two have a lot of variances as well.