Contracts for difference and spread betting are amongst two of the most popular trading methods in the UK, accounting for a considerable proportion of individual and private trade. Not permitted stateside as a result of securities regulations, the two are examples of the ingenuity of financiers to create trading platforms which offer investors the means to speculate on the movements of virtually any market or index, and provide opportunities for the trader to leverage his expertise without actually exchanging any underlying assets.
Indeed, the two have a number of similarities. Both are highly leveraged types of trading, which can deliver multiple times the initial position in profit with absolutely no upwards limit on earnings. Both deliver economically similar results, steering largely clear of the market and provide traders with practically the same financial effect, and both are notorious for being particularly risky, with the ever present threat of unlimited down side liability.
Tax Difference between CFDs and Spread Betting
But it’s where CFDs and spread betting differ that really matters. Firstly, and perhaps most importantly, financial spread betting carries a considerable tax advantage in situations where it does not provide the trader’s mainstream of income. Because spread betting is regulated in the UK as a gambling activity rather than an investment activity, and no assets (which include tradable instruments) are actually changing hands, capital gains tax is not payable on the profits from spread betting – with contracts for difference, that’s not the case.
CFDs do attract CGT liability, although like financial spread betting they remain exempt from stamp duty, thus providing a means of accessing securities without the need to incorporate the relevant 0.5% liability – a saving that is of particular use to larger investors. Similarly, losses from trading contracts for difference can be carried forward and applied in relief against future trading profits to reduce overall liability on your trading income, whereas spread betting doesn’t benefit from any such relief, for the same reasons as it enjoys exemption from CGT.
More on Financial Spread Betting vs CFD Trading
Aside from the tax issue, there are also points of difference to be highlighted in the way in which pricing is pitched to the investor. In spread betting concern is cast to the number of PIPS in movement of a position, with PIPS X STAKE providing the profit component. With CFD trading, positions are quoted in a manner more akin to share dealing, with traders in a position to take either a long or short position on the market in a way that is almost indistinguishable from other types of share dealing.
Furthermore, CFD brokers on the whole tend to derive their profit from transaction fees, charging a percentage of the margined total position in addition to interest fees for the leverage provided. In contrast, spread betting brokers normally make their profits from the spreads they build in, reflecting a certain number of pips in every trade which ensures a portion for the broker whether the markets move up or down. For many traders, the latter proves the more attractive option of the two, preferring to pay out of earned profits rather than footing the bill in the form of commissions up front.
While spread betting and contracts for difference are similar in a number of key ways, they nevertheless have their differences in characteristics and style, and the advantages of both make them more or less amenable to particular trading situations. Regardless of the most appropriate option for the given trading scenario, both spread betting and contracts for difference equip traders with the ability to ramp up their earnings potential from single trades, while providing some degree of tax advantage over regular share trading.