CFD vs. spreadbetting

Hi,

Cannt seem to get my head around to this one but given that spreadbetting and CFD trading are so similar and also that there are no commission/ tax liabilities in spreadbetting...why is the CFD product still alive ?

Moreover,i recently opened an account with ETrade and got a call from their rep.I said i dont have the minimum 5000 GBP they need to open a CFD account and i can only put aside 300 quid.To that he replied that i cannt operate a CFD account but can still do spreadbetting .Wonder why this is the case ??

Is spreadbetting safe ? I mean what is to stop a provider from marking up the price so that i always remain on the loosing side no matter the direction of the underlying instrument ?

What happens if they loose ? who pays ? and what is in it for them ?

Thanks,
kk

One of the most important factors to bear in mind is spreadbetting is not trading, its betting, like going to ladbrokes for the 3:30 at Cheltenham. You are betting against the house. The reason SB's allow you to trade with such a small amount is it equates to more punters and therefore, more money.

I use an SB account still for testing strategies but wouldn't recommend seriously trying to trade with one. This is all through my opinion and experience and many here happilly spread bet.

Remember 80/90% lose so although the SBs have winning clients, they have alot more losing ones!

HTH

wasp said:

Remember 80/90% lose so although the SBs have winning clients, they have alot more losing ones!

HTH

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I am not sure if i get this bit - surely SB is not random betting like on the outcome of a football match ?it is based on an underlying instrument just like a CFD and some good technical analysis can reduce the rink of loosing if not remove it .and betting or trading - you can win or loose the same way as you do in a CFD

given that the risks are the same but the rewards with SB seem to be better ( no tax,no commission) i just wonder why people still do CFDs ?( mind you i do CFDs too - just trying to see if i am missing something)

kk

kkarank said:

Is spreadbetting safe ? I mean what is to stop a provider from marking up the price so that i always remain on the loosing side no matter the direction of the underlying instrument ?

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If they marked up the price too aggressively, then they'd have a flood of punters coming in for the opposite side of the trade, ie arbing it.

Wasp is right though - they can make it very difficult for scalping / day-trading by just skewing it a little. Some are better than others - a quick search through these boards will reveal the heroes and villains. For position trading on the other hand, they're fine.

With CFDs you need to check that the company is actually giving you the market quote and hedging your transaction through the market, otherwise there's not much difference between what they're doing and the spreadbet firm - ie your position is against the broker rather than the market.

Jack o'Clubs said:

If they marked up the price too aggressively, then they'd have a flood of punters coming in for the opposite side of the trade, ie arbing it.

Wasp is right though - they can make it very difficult for scalping / day-trading by just skewing it a little. Some are better than others - a quick search through these boards will reveal the heroes and villains. For position trading on the other hand, they're fine.

With CFDs you need to check that the company is actually giving you the market quote and hedging your transaction through the market, otherwise there's not much difference between what they're doing and the spreadbet firm - ie your position is against the broker rather than the market.

Click to expand...

I've never understood why spreadbetting is so frowned on yet CFD's are considered such an acceptable instrument - I honestly believe it's all in the name :?: .

Surely they're both derivatives that rely on someone else taking the opposite side, be it an opposite bet or a hedge in the futures market?

It may be a measure of my ignorance but whatever the criticisms's,in my experience, the spreadbet price is calculable from the underlying so whatever the structure behind it, it doesn't matter.

(Nonof the above is relevant to scalpers where I can understand they get a bad deal from a SB firm - who'd struggle to manage the opposite side profitably)

UTB

the blades said:

I've never understood why spreadbetting is so frowned on yet CFD's are considered such an acceptable instrument - I honestly believe it's all in the name :?: .

Surely they're both derivatives that rely on someone else taking the opposite side, be it an opposite bet or a hedge in the futures market?

It may be a measure of my ignorance but whatever the criticisms's,in my experience, the spreadbet price is calculable from the underlying so whatever the structure behind it, it doesn't matter.

(Nonof the above is relevant to scalpers where I can understand they get a bad deal from a SB firm - who'd struggle to manage the opposite side profitably)

UTB

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I largely agree. I was speaking to CMC recently at a seminar and they made it clear that for a UK client there was absolutely no point in using their CFD platform - they'd get identical prices to their spreadbet service, but without the tax benefit. In their view CFDs were only of use to non-UK clients where it might be either illegal or have no tax advantage to structure the trade as a bet.

Jack o'Clubs said:

I largely agree. I was speaking to CMC recently at a seminar and they made it clear that for a UK client there was absolutely no point in using their CFD platform - they'd get identical prices to their spreadbet service, but without the tax benefit. In their view CFDs were only of use to non-UK clients where it might be either illegal or have no tax advantage to structure the trade as a bet.

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so then why is the CFD product still alive then ?? from what i have heard and experienced so far - SB seems to be a better deal than the CFD - there are certain inherent risks with both,there are certain pre-requisites that the broker needs to meet

I just wonder if spreadbetting is a safe option though - i know in CFD you are covered under FSA regulations but SB being a bet rather than a trade i doubt if it would be covered .That being said one can only go by 'word of mouth' about who is a good SB company

cheers
kk

kkarank said:

so then why is the CFD product still alive then ??

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As I say, they need to offer for non-UK clients, and I daresay there's a decent market in the UK of clients who see CFDs as 'investing' and spreadbetting as 'gambling' and therefore wouldn't touch the latter. I can also see circumstances where I might prefer a CFD that I knew was hedged in the market so there was no exposure to the broker in the way that I might be exposed through a spreadbet.

kkarank said:

I just wonder if spreadbetting is a safe option though - i know in CFD you are covered under FSA regulations but SB being a bet rather than a trade i doubt if it would be covered .That being said one can only go by 'word of mouth' about who is a good SB company

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Pretty sure that spreadbet firms are covered by FSA as well (for what it's worth). Ultimately word of mouth (or this board) the best way of finding out the best broker (whether CFD, spreadbet, or stocks) for your needs I think.

Jack o'Clubs said:

......I can also see circumstances where I might prefer a CFD that I knew was hedged in the market so there was no exposure to the broker in the way that I might be exposed through a spreadbet.

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sorry - but what is hedging ?what has that got to do with CFDs

cheers
kk

kkarank said:

sorry - but what is hedging ?what has that got to do with CFDs

cheers
kk

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kkarank,

hedging - if you take the SB or CFD company who takes one side of your "bet", they stand to ose whatever you win (unless their book is balanced with opposite "bets") - so they may "hedge" their bets by taking out an opposite trade (selling a "futures" contract for the stock you "bought"), their profit is then the difference between the spread they've charged you and the spread they pay.

HTH
UTB