Whether you trade shares, indices or currencies, as a modern trader you can access several different vehicles in a bid to generate sustainable returns.
Take spread betting and CFD trading, for example, which are essentially margined products that enable you to participate in various markets without assuming ownership of the assets that you invest in.
Despite the similarities between these two trading vehicles, there are a number of subtle differences to consider before selecting one over the other. We’ll explore these below, after we’ve taken a closer look at how spread betting and CFD trading works.
How Does Spread Betting and CFD Trading Work?
The popularity of spread betting extends far beyond the financial markets with its wider definition referring to any type of wager on the outcome of an event that pertains to the accuracy of the bet rather than a simple ‘win’ or ‘lose’ scenario.
If we apply this to the financial markets, spread betting can be used to speculate on how a specific asset will perform over a fixed period of time. If you were a currency trader, for example, you could leverage this vehicle to speculate on whether a chosen pairing would see its value rise or fall, and potentially profit in a depreciating market.
Whilst CFDs work in a slightly different way (we’ll have more on this below), they also represent a popular form of derivative trading that enables individuals to speculate on price movements across an array of markets.
Commonly used to trade indices and shares, whilst in 2017 there were approximately 280,000 customers trading CFD products each and every month in the UK.
What are the Differences Between these Two Vehicles?
Perhaps the most obvious difference between these two vehicles is how they’re treated for taxation. More specifically, spread betting is free from capital gains tax, where any profits derived from spread betting are subject to this levy.
On a similar note, spread betting is less accessible to traders on a global basis. So, whilst this is commonly used in the UK and Ireland, CFDs are available throughout the world and therefore more synonymous margined products and trading.
As we’ve already touched on, there’s also a slight difference in terms of these trading vehicles work. For example, spread betting follows a more simplistic model that requires you to speculate on whether the price of a financial instrument will rise or fall.
Conversely, CFDs require you to buy or sell a specific number of units in a single instrument, mirroring the more traditional method of trading stocks and shares.
However, you don’t actually own the underlying asset as a CFD trader, which enables you to take a position with a notional value that’s far higher than your initial deposit.
Just like spread betting, this type of margin creates the potential for significant returns, although it can also trigger huge losses if your position turns against you.