Some active traders, particularly in the UK, prefer investing in spread betting and Contract For Difference (CFD). For newbies, these trading platforms may seem similar, thus to make everything clear, it’s essential to determine the difference between CFD and spread betting specifically in terms of risks and rewards.
Apparently, the difference between spread betting and CFD is very minimal. These are both derivative products in which the investors speculate whether the price will fall and rise. The investors are allowed to go short or long, and they can also improve the leveraged product. This means that even if an investor puts a small deposit, he can expect for significant exposure to the underlying asset in the market.
On the other hand, CFDs are associated with real assets including currencies, commodities or shares, while spread betting commonly takes place in a wide range of activities such as sporting events.
Common Factors in Comparing CFD and Spread Betting
- Tax advantage
Spread betting lets the investors take a chance or guess the price movements of the financial market in making profits or losses. It is considered as legal gambling that’s why if an investor won, he is not obliged to pay tax, thus spread betting is tax efficient and is rewarding to invest.
On the contrary, CFD has its own financial advantages. It’s because the investor can use the losses incurred on CFD trading to compensate the taxable gains in the investment portfolio.
- Additional costs
Another factor that makes spread betting more appealing to investors is the additional costs. This product rarely requires the trader to pay commission; it’s because most of the business’s charges are integrated into the spread.
In the case of CFD, the additional costs are considered as risks because once it is left open overnight, the trader will pay the commission for the business carried out.
- Currency risk
When trading CFD, the investor should anticipate that the risk involve difficult to mitigate such as the currency risk. Thus, traders who don’t want to experience currency risk prefer spread betting because even when you’re investing in foreign equities, there’s nothing to worry about currency risk.
Hedges are considered to be a powerful tool that can safeguard the investment. That’s why even if spread betting is very popular in the United Kingdom, still many investors prefer CFD in terms of hedging strategy. Hedging provides peace of mind to an investor particularly during the period of market volatility.
To conclude, spread betting is an excellent product for those less experienced or newbie traders. But, CFD is the best option if you’re planning to trade for a longer term. Most professional traders choose CFD as a perfect tool due to its inherent advantages.
If you want to invest your money in trading, you must study how these derivative products work and how it can grow your money. You can find a lot of information from CMC Markets. Whichever product you may choose, keep in mind that it won’t make you rich overnight.