For a newbie, one of the most basic things to do upon entering the world of financial trading is the comparison between derivatives. One popular comparison is nearly always CFD trading VS financial spread betting. The main reason for the comparison is because spread betting is considered by many veterans in this field as the closest relative of Contracts for Difference trading. For this reason, one may find there are surely some similarities as well as key differences between the two. These include the detailed mechanics, technicalities, strategies and many more. This article will discuss some of the basic and key difference between the above mentioned instruments.
On the one hand, when comparing these two popular instruments, the first and foremost aspect which should be done by the trader is to define the instruments being compared. In this regard, spread betting is generally referred as a form of gambling activity in many countries. It is generally characterized as a form of wagering to the any possible outcome of any event. For example, spread betters may bet on the possible level of prices of specific assets after a significant event like elections, holidays and the like. However, its unique characteristic has something to do with its pay-off. This is because the earnings are based on the precision or accuracy of the bet of a wager instead of just binary options, which is either winning all or losing all.
On the other hand, there are at least three aspects why spread betting is more advantageous compared to contracts for difference trading. These are related to the tax efficiency, commission as well as the trade in sterling. Firstly, in terms of taxation in CFD trading VS financial spread betting, the latter is more efficient. This is because it is tax free in many countries since it is considered as a gambling activity in the first place. Hence, there is no capital gain cost from the profits that a trader gets from it. Secondly, there is also no commission in making spread position. Lastly, it may also be denominated on your preferred currency, whether it is sterling or not.
On the other hand, the comparison of these two instruments will not be complete if the one does not also discuss the disadvantages of the two. In this regard, there are also three factors about the setbacks of financial spread betting over CFD trading. These are about the wider spreads, fixed daily markets and even the lesser transparency in pricing. Firstly, the spread offered within the spread betting company is usually wider than in CFDs. In this light, long positions need to be longer while short positions shall be in shorter orders as well. Secondly, spread betting is commonly limited to a single trading day only, which makes this a problem for long term traders. Lastly, the pricing of the CFD position is determined much easier.