When entering a financial market, novice traders wonder which product to start with. Indeed, the chosen derivative may influence their first impression, consequently impacting their decision whether to continue trading or not.
That being said, we’ve come up with a comprehensive guide on what one should choose: spread betting or CFD trading. Continue reading to find out more.
What is CFD trading?
Contracts for difference (CFDs) are a derivative financial instrument, a type of contract under which the delivery of the underlying asset is not provided. Instead, the seller (usually a broker) and the buyer make a mutual settlement, compensating for the difference between the price specified in the contract and the actual quotation or indicator at the end of the contract.
Where can CFDs be applied?
Contracts for difference can be used to trade on a wide range of assets, such as stocks, currency pairs, bonds and more. The trader can either place a buy (long) position or sell (short) position using leverage, and he only needs to deposit a fraction of the full trade value.
Such contracts were quite often used in the currency market when fluctuations in the dollar exchange rate were significant. And not only between banks but also between banks and their clients, which did not violate the currency legislation, since the supply of currency was not initially implied, and the calculations were made based on the Central Bank rate.
Why opt for this type of trading?
Such transactions allow, on the one hand, to control financial risks, hedge them, and on the other hand, receive speculative profit (if successful – losses are equally magnified).
Spread betting: what is it?
This is another method for trading within the financial markets. The concept itself came from the betting business; there it meant a kind of bet, taking into account not only the result but also the circumstances of achieving this result. You can spread bet on the following: bonds, currencies, stocks, indices, treasuries and more.
For experienced traders or self-confident players, it provides an opportunity to increase the amount of profit received, but at the same time, it proposes many risks, similar to CFD trading.
How to spread bet
Spread betting can be used to speculate on exchange rates, stock prices, and the fluctuating value of other financial securities. Traders may want to study price charts to determine if the curve will go up or down and place a buy or sell position depending on the expected outcome.
- Offer — buy. If you think the value of an asset is due to increase, you could open a buy position and sell when the price is high enough to record you a profit.
- Bid — sell. If you think the value of an asset is due to decrease, you could open a short sell position when the price is high, and buy back the asset when it has dropped to a low point, saving you money.
The distance between the buy and sell price is called the spread.
Spread bets vs CFDs
To find the best trading method for you, you should compare some of the most important factors of the two candidates before opening an account with a broker.
| Spread betting | CFDs | |
| Profit/loss calculation | The difference in price of the bet is multiplied by the stake size | The difference between entry and exit prices multiplied by the number of CFD units |
| Leverage | Yes | Yes |
| Profits are not taxed | Yes | No – subject to capital gains tax |
| Opening long and short positions | Yes | Yes |
| Trading 24/5 | Yes | Yes |
| Risk-management (stop loss and take profit) | Yes | Yes |
Bottom line
All in all, when picking your trading product, theory may be insufficient. Our advice would be to sign up for a broker’s demo account, where you can practise both methods using virtual funds, and eventually settle on the one you find most easy and comfortable for you.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
