In this Spread Betting vs CFD post, we will show you the main characteristics of and differences between each of these financial instruments. You will see that spread betting and CFDs are financial instruments that will allow you to diversify your investment portfolio. Spread betting is very popular in the UK because it is tax-free. It is important to take into account that spread betting and CFDs are really complex instruments and, although they have the potential to generate great profits, you must be careful because they can also generate great losses.
If you are an investor that uses CFDs or you are thinking of investing your capital in these types of instruments, the best thing for you is to complement your strategies with expert financial advisory services. In this way, you will be able to make better decisions, choose the best balance between risk and capital, and structure profitable investment plans. We recommend Capitalist Exploits financial services because it will allow you to have a broader view of the market. In fact, Capitalist Exploits provides information and analysis into investment opportunities that have the potential to provide impressive gains without taking on additional risk.
Before we begin discussing the differences between spread betting vs CFD, let's first cover some basic definitions as a starting point to be able to analyze each of these excellent financial assets. Below you will see the most relevant characteristics, common elements and differentials for you to select the financial asset that best suits your needs.
#1 Spread Betting Vs CFD: What Is A CFD
CFD is the acronym for “Contract for Difference” and consists of buying or selling a contract where the profit or loss is given by the difference between the entry price and the closing price of the position. That is, when you generate a buy position for a CFD and then close this order by selling the instrument, what you are doing is creating a kind of bet on the future direction in which the real or underlying asset will move.
The result of your investment will depend on the evolution of the price of the underlying asset. In this sense, if the price of the underlying asset rises, you will make a profit with the CFD. If the price of the underlying asset decreases, you will lose money with the buy of the CFD.
Please note that buying a CFD does not actually mean owning the asset. There are a large number of CFDs due to a large number of financial assets on the market.
Most Popular Underlying Assets To Trade With CFDs
- Stocks (Apple, Tesla, Google, Facebook, Amazon)
- Raw materials (Gold, Oil, Natural Gas, Silver, Platinum)
- Crypto assets (Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Cardano (ADA), XRP)
- Currencies (EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CAD)
- Indices (GER30, NSDQ100, DJ30, SPX500, FRA40)
- ETF (SPY, VXXB, TLT, HMMJ, QQQ)
Thanks to this large number of possibilities, a CFD will allow you to create diversified investment portfolios. That is, they allow structuring strategies that have the potential to generate profits. Another important element to take into account is that CFD transactions are instantaneous and offer high liquidity, for example, in the case of CFDs on stock indices because they have high acceptance in the market. Also, a CFD allows:
Investment With Margin Account
With a margin account, you can borrow money within the investment platform with the intention of trading financial instruments such as CFDs. This will allow you to take advantage of great investment opportunities in specific instruments in which you can generate profits. The margin account will allow you to generate leverage many times higher than your capital.
Buy Fractions Of Stocks
You are not really the owner of the underlying asset when you buy a CFD. In this way, a CFD allows you to buy or sell a fraction because you are investing in the evolution of the price of the underlying asset. For example, thanks to this feature you will be able to get fractions of stocks that are highly-priced for capital levels of retail investors that are beginning in the world of trading.
Related: We recommend our articles “eToro Review: Multi-Asset Social Trading And CopyTrading Platform”. There, you will see how to use investment platforms to trade a lot of financial instruments such as CFDs. You will also find some interesting tips that can help you when devising investment strategies.
#2 Spread Betting Vs CFD: What Is A Spread Betting
Spread betting is a financial derivative that enables trading on a wide variety of financial instruments such as stocks, indices, bonds, forex, among others. As with a CFD, when you trade a spread betting you do not own the underlying asset. In this sense, you will only win when the prices of the underlying asset rise or fall in the direction you speculated they would move.
Spread Betting is legal and popular in the UK and other parts of Europe. However, in countries like Australia, Japan or the United States, Spread Betting is illegal.
Below we will present several concepts that will definitely help us understand how spread betting works.
As in the case of CFD, with a margin account, you can borrow money within the investment platform to trade financial instruments such as spread betting. This will let you take advantage of great investment opportunities because you will be able to handle sums of money higher than your capital.
In short, the spread is the difference between the buy and sale price of a financial instrument. Whenever you find the price of financial instruments you will find a sale price (ask) and a buy price (bid). In general, the purchase price will always be higher than the sale price. This spread is the benefit of the investment platform.
Landing The Spread Betting
Spread betting is a very popular instrument in the UK because they allow speculation for both long positions (buy) and short positions (sell). Keep in mind that when you make a long position you want the price to go up for a return. Otherwise, when you sell, you expect the price to drop. Here is an example to contextualize all these definitions.
Suppose you acquire a spread betting on the prices of a stock index. Also, imagine that the index is quoted at 2,000 points. In this hypothetical example, you are very sure that the prices of the index are going to rise so you place a bet of £5 for every point that the index goes up. In the following chart you can see that if the index goes up, you could have hypothetically earned £1,000 because the index moved from 2,000pts to 2,200pts, an increase of 200pts.
#3 Spread Betting Vs CFD: Tax
Take into account that when you create investment strategies you can buy or sell financial instruments to:
Invest: When you invest in stocks, you allocate capital in the value of a company. These types of investments are generally long-term because you need to wait for your aspirations regarding the performance of the share price to coincide with the real value of the shares.
Speculate: This type of operation focuses on seeing the evolution of the price to try to generate profits. These types of strategies are generally short-term. There is a lot of financial and market analysis to get an idea of the direction of quotes. In some cases, this type of trade is usually compared to a kind of bet.
These definitions are very important in UK law because each of these instruments is classified differently and is subject to tax as a result. If you want to know a little more about taxes in the UK, visit Her Majesty's Revenue and Customs (HMRC). It is the department responsible for the administration and collection of Income Tax, Corporation Tax, Capital Gains Tax and Inheritance Tax.
CFD Tax UK
The first thing you should check to know if you should pay some type of tax when trading CFDs is the official HMRC page. For HMRC the term contract for differences (CFD) is defined as a contract whose purpose is to get a profit or avoid a loss by reference to fluctuations in:
- The value or price of the property to which the contract refers.
- An index or other factor designated in the contract.
In this sense, in the UK a CFD refers to a contract that allows obtaining a financial profit. The total profit is calculated by subtracting the sale value from the original buy value. For this reason, it is necessary to pay Capital Gains Tax
We recommend you read our article “CFD Tax UK: Should You Pay Them?” There you will find definitions and uses of CFDs. Furthermore, you will see that CFD transactions are instantaneous and offer high liquidity and the possibility that you can determine if you made a profit or loss every day. All these elements have made CFDs in the UK very popular and for this reason, it is very important to determine the tax implications when you trade with these types of instruments.
Spread Betting Tax UK
Spread betting is seen in the UK as a simple speculative bet and so is not subject to tax. But, since the result that you will get with the spread betting is not classified within the capital gains, it is also not possible to deduct the losses. These types of financial instruments are very popular because you do not have to pay taxes on gambling winnings in the UK.
#4 What Is The Difference Between CFD And Spread Betting
The main difference between CFD and spread betting is that you do not have to pay taxes on capital gains with spread betting. In the following table, you will find the most relevant aspects of each of these strategies.
|Tax||Profits obtained from spread bets are exempt from UK Capital Gains Tax (CGT).||You must pay capital gains tax (CGT) when trading CFDs as long as you are exempt from the Annual Exempt Amount.|
|Can losses be offset as a tax deduction?||No. It's a bet.||Yes. It is profit or loss of capital.|
|Time||Intra-day, daily and medium-term.||Intra-day, daily and medium-term.|
|Expiration date||All bets have a fixed expiration date.||No expiration dates.|
|Do you own the asset you are trading?||No||No|
#5 Do You Need A Financial Advisor When Investing In Spread Bets And CFDs?
Keep in mind that Spread Bets and CFDs are complex instruments that require you to choose the best investment strategies. For this reason, you should not buy Spread Bets and CFDs lightly, or because everyone talks about its evolution. You should always analyze to make the best decision. Keep in mind that you should complement your investment ideas with the recommendations of a qualified advisor. In fact, we suggest our post “Capitalist Exploits: A Measured Approach To Achieving Asymmetric Returns” where you will learn much more about investing and get great recommendations. In it, we cover the type of content and services Capitalist Exploits offers, how it works, and what markets they recommend you invest in.
Below you can see a summary table with the main features of Capitalist Exploits:
|How do they select investments?||Capitalist Exploits seeks investment opportunities worldwide through in-depth analysis, market research, and investment networks. |
The team looks for the best investment opportunities in different sectors, industries and global markets.
Then they determine if the opportunity can be safely seized. After identifying opportunities, they estimate the risk associated with each investment to select the best risk-capital ratio.
The next step is to identify the most appropriate way to allocate capital in each scenario. In this way, investors can adapt to possible changes.
|Are the recommendations diversified?||Yes, they provide a high level of diversification because Capitalist Exploits seeks investment opportunities worldwide in and out of the stock market.|
|Do they help you analyze each recommendation?||Yes|
|Do they generate free content?||Yes, the company offers free content and a blog with highly relevant podcasts and opinion pieces. Capitalist Exploits also offers a private Telegram channel called “Hedgies Uncut”. There, hedge fund managers discuss their investment positions and ideas.|
|What type of investor is it for?||Anyone with any level of experience or geographic location can use the service. It is ideal for both long-term and short-term investors who are looking for investment opportunities in and out of the stock market. For example, shipping, energy, natural resources, Bitcoin and many more.|
Spread Betting Vs CFD In A Nutshell
CFD is the acronym for “Contract for Difference” and consists of buying or selling a contract where the profit or loss is given by the difference between the entry price in the position and the closing price of the position. Please note that buying a CFD does not mean owning the asset. For its part, spread betting is a very popular instrument in the United Kingdom because they allow speculation for both long positions (buy) and short positions (sale). It is important to note that in the case of CFDs you must pay capital gains taxes while in the case of spread betting you must not pay this type of tax because it is classified as a bet.
Please note that both CFDs and spread betting are complex instruments. Also, since there is leverage, you need to be careful because losses can be significant. We recommend that you consult experts in the area of financial services.
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