CFDs Vs Spread Betting

If, for example, the margin on a firm you're interested in was 10%, establishing a position of £100,000 would only require a deposit of £10,000. Any running profits you make can be used as margin to establish new positions but any running losses would have to be made good by reducing your position or providing additional funds.

While stamp duty of 0.5% on all UK share purchases has in the opinion of some traders reduced the cost effectiveness of 'day-trading' traditional stocks and shares, both CFDs and spread betting are exempt and this has added to their appeal. CFDs are liable to capital gains tax whereas spread bets are tax free, but losses incurred from spread bets are gone for good while CFD losses can be offset against future profits for tax purposes. When you trade in CFDs, you purchase those contracts in almost the same way that you'd buy shares. So if you wanted exposure to 1,000 shares in a company, you'd have to sell 1,000 contracts at, say, 494p per contract rather than simply placing a £10 per point bet with spread betting to get a similar return.

The other difference between the two instruments lies in the flexibility in the bid-offer spread. Most CFD providers allow you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. With CFD you are the price maker, which is why hedge funds tend to use CFDs rather than spread betting. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. 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's also mimic almost every aspect of actually owning the underlying share or market, so if you hold a position long enough, you receive the benefit of any dividends being paid on the underlying shares.

CFDs and spread betting have particular features that will appeal to different trading styles and there is no one "best instrument" to use. Although they should not be regarded as substitutes for long term investment or saving, as more people seek to take control of their financial destiny, there's been a growing realization that "going short" is a legitimate means of trading in market that's become increasingly difficult to profit from in a traditional sense.