Most of the main providers of spread betting services are also very active in the cfd trading market and while both spread betting and cfds promise very high returns and profits for a relatively small outlay there are some significant differences between the two. Cfds were initially used by hedge funds and institutional investors to hedge their exposure to stocks on the London Stock Exchange in a cost-effective way. A contract for difference is simply a contract between two parties stipulating that the seller will pay the buyer the difference between the current asset value and its value at the time of expiration of the contract. If the difference is negative, then the buyer pays the seller.In the late 1990s cfds were introduced to retail investors, who realised that their real advantage was not exemption from tax but the ability to trade on leverage.
In that respect, a cfd is very similar to spread betting, but as with many leveraged products, maximum exposure is not limited to the initial investment and it is possible to lose more than you put in.It is wise to ensure these risks are mitigated through the use of “stop loss” orders.Both products allow the user to go short and, as they are margined products, you can “gear up” or take a position that is a multiple of your actual available funds.Spread betting positions are very similar to futures products in that they have an expiry date (cfds don’t) and close out when contract runs out (usually daily, monthly, or quarterly).
It’s true that cfds are liable to Capital Gains Tax whereas spread bets are free from both stamp duty and GCT, but spread bet losses are gone for good while cfd losses can be offset against future profits for tax purposes. The other difference between the two lies in the flexibility in the bid-offer spread. Most cfd providers allow you to post orders anywhere within the bid-offer spread. Spread betting firms post their own “take it or leave it” price exactly as a bookie would, whereas with cfd, you are the price maker. Because of this, the cfd spread quote will always be very close to the underlying price of the share or commodity that you are following. Cfd online trading also closely mimics actually owning the underlying share or market, so if you hold a position long enough, you could receive the benefit of any dividends being paid on those underlying shares.
