Spread betting. Contracts for difference. At first glance they appear almost identical, you can go long or short. You never own the underlying asset, so you don’t pay stamp duty and both involve a high degree of leverage, which can magnify your returns but can amplify losses too. Now look closer, there are some important differences. First, deal sizes. With spread betting you bet an amount of money per point, say £5 on whether a market will go up or down. However, with CFDs, you buy and sell contracts that represent an amount per point in the underlying market.
For example, one standard FTSE’d contract is worth £10 per point. Tax. Spread betting profits are currently free of capital gains tax but CFDs are liable. While this may seem a major drawback, any losses can be offset against future profits for tax purposes, which makes CFDs good for hedging. Expiry times. Spread bets tend to operate on a fixed timescale, anything from a day to several months. While CFDs generally have no expiry dates. And then there is direct market access. Or DMA, this means you can trade directly into the order books of major stock exchanges or forex providers. Direct market access is available for shares CFDs and forex CFDs. You can’t however, get DMA when spread betting. And finally, share dealing. You trade shares CFDs at the market price, pay a commission on all transactions. When spread betting all charges are included in the spread. So which is best for you? Well if you want tax free profits, full control over the size of your deal or you want to deal shares in small sizes without having to pay a minimum commission, then spread betting could be for you. However, if you want DMA on shares and forex, a product that feels similar to trading in the underlying market or an efficient way to hedge your portfolio then you might choose CFDs.