LONDON, January 24, 2011 /PRNewswire/ -- Spread betting and CFD trading are both popular ways of speculating on financial markets. But with many providers, such as City Index (http://www.cityindex.co.uk/), offering both spread betting and CFD trading, how do you choose which method is right for you?
As with any form of financial trading, it is important to do your research thoroughly in order to make informed decisions. Please be aware that spread betting and CFD trading are high risk products.
Both products are derivatives, which means you do not own the underlying share, currency or commodity. Instead, you speculate on how the underlying instrument will perform within the financial markets. Because you do not own the instruments, you currently do not have to pay stamp duty on your returns.* However, you do have to pay capital gains tax on CFD profits. Like many things in trading, this is both an advantage and a disadvantage. Losses made in CFD trading (http://www.cityindex.co.uk/cfd-trading/) can be offset against future profits for tax purposes, where as losses in spread betting are gone for good.
The Cost of Trading
Another major difference between the products is in the way they are paid for. In spread betting, the price is built into the eponymous 'spread', the difference between the buying and selling price that must be covered by the trader before a profit can be made. CFD trading is paid for by a small commission charge. Because of this difference in pricing, CFDs generally have tighter spreads.
The Trading Period
The contract periods between the spread betting ( http://www.cityindex.co.uk/spread-betting/) and CFD trading is a further difference. Spread bets have a fixed expiration point and will close when the contract runs out. Contracts are usually daily, monthly or quarterly, and bets can be rolled over at a charge. CFDs have no such expiration date and can be kept running indefinitely.
In spread betting, trades are always denominated in your local currency (pounds sterling in the UK). This is not the case with CFDs, which are traded in their native currency. So if you are trading on stocks on the US stock exchange, not only will you have to think about the rises and falls of that particularly stock, you will also have to think about the changes in exchange rate between sterling and the dollar. Obviously this can go in a trader's favour, but be warned, it can also reduce profits or increase losses.
Whether you choose to use spread betting or CFDs, it is important to have all the facts before you start. To learn more about these trading products, try a free seminar with City Index: http://www.cityindex.co.uk/learn-to-trade/seminars.aspx
Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
*Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
SOURCE City Index