Investing in financial markets can lead to massive profits. However, investors and traders cannot always access the capital needed to generate substantial returns.
This is where leveraged goods come in because they offer traders the opportunity to get considerable market exposure with a small starting deposit.
CFDs and spread bets are leveraged goods common in countries such as Australia and the U.K (United Kingdom). They are fundamental to equity, index, and forex markets.
Both these instruments are similar in that they are margined goods. This means you can take a relatively large position while depositing just a small portion of the entire value of the trade.
CFDs and spread bets are similar at face value; however, a couple of underlying nuances differentiate them. Let’s look at these similarities and differences.
What Are the Similarities of CFDs and Spread Bets?
CFDs and spread bets are leveraged derivative goods whose value comes from a fundamental asset. In both these trades, the investor doesn’t own the assets in the underlying market.
When trading CFDs, you are wagering on whether the value of the fundamental asset will increase or drop in the future. Therefore, CFDs suppliers discuss contracts with the option of long and short positions based on the price of the fundamental asset.
Investors take a long position believing the fundamental asset will rise. Conversely, they can also sell short if they believe the fundamental asset will decrease in value. In both instances, the investor expects to draw the profit between the opening and closing value.
Likewise, a spread is the difference between the buy price and the selling price quoted by the spread betting firm. The underlying movement of the asset is calculated using basis points with the option to acquire long or short positions.
In both CFDs and spread bets, initial margins are needed as opening deposits. Generally, margin varies from 0.5% to 10% of the value of the open positions. For more unstable assets, investors can expect bigger margin rates, and for less unstable assets, they can expect less margin.
CFD and spread betting investors only buy a small portion of the fundamental asset’s entire value, but they are entitled to the same profits or losses as if they paid the full value. However, for both, companies can contact the investor for a second margin payment later.
Risks in ventures cannot be avoided. However, it’s your responsibility as an investor to make tactical decisions to alleviate severe losses. For both CFDs and spread bets, the would-be returns can be 100% equal to the underlying market but so can be the would-be losses.
In both CFDs and spread bets, a stop loss can be used prior to the contract commencing. A stop loss is a prearranged price that automatically shuts down a contract when the price is reached.
What Are the Key Differences Between CFDs and Spread Betting?
Spread bets have fixed end dates when the bet is placed, whereas CFDs don’t have end dates. Likewise, spread betting is done OTC (over the counter) and through a broker, whereas CFD trading is done directly within the market. Direct market access prevents some pitfalls by allowing for simplicity and transparency of completing electronic exchanges.
Apart from margins, CFDs require the trader to pay commissions and transaction fees to the broker. Spread betting, on the other hand, doesn’t need commissions or fees.
When a contract is shut down, and profits or losses are realized, the trader is either owned cash or owes cash to the trading firm. Therefore, the trader will draw profits from the exit position minus the entry position and charges if gains are realized.
Spread bet profits are the variation in basis points multiplied by the amount negotiated in the primary bet. In addition, both spread bets and CFDs are subject to bonus payouts when traders take long positions.
Although there is no direct proprietorship of the asset, a broker and spread betting firm will pay bonuses if the fundamental asset performs well. When CFD trades generate profits, the trader is subject to capital gains tax; spread betting profits, on the other hand, are tax-free.
To sum it all up, CFDs and spread bets have similar fundamentals on the surface. As a result, the nuanced differences between them may not be apparent to new investors. However, actual risks exist for both, so it’s up to you to decide which is the better option.