What is CFD trading? What are CFD’s?
CFD stands for a ‘contract for difference’. It is a well-renowned form or system of derivative trading. It allows you to analyse the incline and decline in the rapidly globalising economic trade, which includes commodities, treasuries, indices, shares and currencies. It is extremely beneficial as it enables you to trade on the periphery, that is buy if there is a probability of prices rising and sell if you think that the prices might go down. This provides a form of safe trade, but you need to be careful or else losses exceed the gains.
A contract for difference is an agreement made between two people (usually the buyer and the seller) in a future contract to exchange the initial value of a stated financial asset when the contract is either open or closed. Here, the differences in settlements are made by means of cash payments rather than the provision of physical instruments or securities.
A CFD (Contract for Difference) forex broker is a brokerage firm that aims at providing financial trading service for the trade of financial assets. XTB and XM are amongst the best CFD brokers that offer online CFD trading. Since 1990’s, many global financial markets and broker institutions adapted to the rapid rising of technology and the internet which meant access was not only available for institutions, banks, hedge funds but to the retail market (i.e. the common person, or everyone who can meet the requirements of a CFD broker) in the form of electronic trading. These CFD trading platforms acts as an intermediary between the market and the trader thereby making available functional trading platforms for the trade of CFDs. CFD providers have effective trading tools like technical analysis, advanced charting systems, and drawing tools.
Each trading platform provided by CFD brokers are equipped with user-friendly trading terminals that simplify the execution of trade between participant (i.e. Investor/rader) and the market instruments like stocks, currency, indices and commodities. In the past investors/financial traders had to place open orders or trades via. Telephone to their broker which meant the increasing possibility of not benefiting from executing trade at the desired price; there was an obvious delay in communication. In today’s time, many brokers that offer CFD instruments allow instant execution by the millisecond.
Spread Betting Explained?
It is a form of conjecture which includes making a bet on the probable change in the price of an asset like a security within a specified time. There are two prices quoted in spread betting:
1. The bid: This is the amount that the buyer is ready to pay
2. The offer price: This is the price which the seller is asking for or offering
The investor does not own the underlying asset or security that is being betted upon. The investor just predicts whether the actual price of the main security is more than what the seller is offering or less than what the buyer is bidding. The Foreign exchange currency market is one of the more popular markets (with average +£5 billion dollars a day traded volume) for Spread betting and AvaTrade is amongst the best spread betting forex brokers.
Spread Betting vs CFD trading: The differences
Both CFD trading and spread betting are capable of providing the same kinds of advantages to the investor/trader in terms of cryptocurrency, commodities, indices, shares and currencies.
Let’s check out the major differences;
1. In CFD trading you are not the owner of the fundamental security or the underlying asset therefore so you don’t have to pay stamp duty, but you are subjected to Capital Gains Tax. Whereas there is neither stamp duty nor Capital Gains Tax in UK on the profits earned by spread betting.
2. CFD trading is available all across the globe to customers, whereas spread betting is available only for residents of Ireland or UK.
3. Holding costs might be applied along with CFDs whereas holding costs might also be applied to spread betting, but an extra spread is added to the platform which is applied when any order is executed.
4. In CFD trading when trading shares, a commission is charged to the account when an order is executed which is additive to the spread whereas in spread betting there is no addendum commission which is charged.
5. In CFD trading whether you earn a profit or you lose depends on the multiplication of CFD units and the difference between the starting price that is the price when you executed and the exit price whereas in spread betting the loss or gain is decided by the product of your stake and difference between the entering and exiting price.
6. In CFD trading, to open a position you have to pay a small part of the entire value of trade as the product is leveraged whereas in spread betting to open a position you need to pay a small part of the entire value of spread bet as the product is financially leveraged. For Spread Betting, trades are executed simply on Pound per PIP (Percentage in Point). For example, when trading Forex CFDs you are effectively buying and selling units of currency at specified Bid and offer prices these are referred to as Lots (1 rounded Lot of Foreign Currency is 100,00 units of that currency).
7. CFDs have NO real expiry date (i.e. you have freedom to hold position for a long as you want subject to a brokers condition), whereas in spread betting there is a fixed date of expiry.
8. Compared to CFD trading spread betting is more efficient in terms of tax.
9. In CFD trading, the currency in which trade is done varies according to the market in which buying or selling is done, whereas in spread betting trade will always be in your own currency. In otehr words for CFD trading, you can open a real trading account in multiple denomiated currency (e.g. if your in UK you can open account denominated in US dollar).
10. Spread betting takes place with the help of a broker on the counter whereas CFD trading can be done directly through the market.
11. CFD trading losses can be used to compensate against other profits gained from assets, income etc. for Capital Gains Tax whereas in spread betting you cannot use losses to counterbalance profits made from other assets and income.
Please use the following sites to understand the tax rates and conditions of Capital Tax in your respective in the USA and UK,
There are both advantages and disadvantages of CFD trading as well as spread betting, but sometimes spread betting is preferred due to no compensations and low to no taxes on spread bets which are usually applicable on CFDs. There are risks involved where money is involved so be wise.
Full Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money