How to Trade Forex - The Difference between Spread betting and CFD's
Contract For Difference (CFD's)
A Contract for Difference is a contract between the consumer and the business. Once the contract is complete, an investor will receive the difference between the opening and closing price, or may have to pay the difference if it is negative. Due to restrictions by the U.S Securities and Exchange Commission on over-the-counter financial instruments, CFD's are not currently permitted in the United States.
However, spread betting is a way of an investor speculating on markets and making or losing capital based on their stake and the move in price. Both CFD's and spread betting offer higher returns over a shorter period compared to Stocks, however they also carry much higher risk.
Both CFD's and spread betting give the investor the opportunity to speculate on price movement in a wide choice of markets without having physical ownership of the product actually being traded. With both spread betting and CFD's an investor is able to buy margin (borrowing money from the broker). An investor would usually be required to own between 5% and 10% of the value of the 'open' position. This number can however vary depending on the volatility of the underlying market.
The main differences between CFD's and spread betting:
The main difference is that Capital Gains Tax applies to profit made from CFD trading whereas gains made on a spread-betting account is not. (You cannot offset losses on spreadbets against gains anywhere else).
When trading CFD's you will usually pay a tighter spread and a low commission while spread-betting accounts do not usually pay commission but you will be charged a wider spread. Therefore, many full time traders would prefer to trade CFD's regardless of Capital Gains Tax due to paying less to enter and exit a trade.
Spread bets usually have a set expiry date where as CFD's can run for as long as you want them to. CFD's also allow for bigger positions and minimum contract size, making them a more viable choice for professional investors.
The main difference that would affect most traders is the difference between paying tax or not. However if you pay more on spread with a spread betting account that you do on commissions with a CFD's account is the tax aspect that important? If you were an intraday trader or running a fund then CFD's would be the most advisable route, however as a beginner just learning how to trade there is no harm in sticking to a spread betting account for a while.
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