CFDs Vs Spread Betting - Similarities at a glance
1. With CFD's you trade on Margin i.e. you need only put up a deposit of the total value of the position. Each Instrument has a Notional Trading Requirement and a Margin Requirement. In much the same way as Financial Spreadbetting this may be a % or a fixed £ value.
2. Because you do not physically own the Instrument there is no Stamp Duty to pay.
3. Some CFD providers offer no dealing charges. Some offer no commission charges on Indices but apply commission charges when dealing in Shares (Please do check with the providers.)
4. You Buy at the Offer Price and Sell at the Bid Price.
5. CFD's allow the ability to Buy in the anticipation of a price rise and also Sell in the anticipation of a price fall.
6. The markets you can deal in are virtually the same. E.g. UK, USA Europe, Far East Australia etc.
7. When dealing with Indices, Sectors the trade is identical.
8. Much of the dealing terminology is the same.
9. You can place Controlled Risk Trades.
CFDs Vs Spread Betting - Differences in a nutshell
1. Spread betting prices are synthetic - based on the actual market price but set by the provider. The spread will be wider than the market price as the provider adds a bit in for his commission. By contrast, CFD prices are the best bid and offer from the actual offer and if you have direct market access you can actually trade on even better terms.
2. By definition spread betting providers are market makers meaning that they have the freedom to quote their own prices at their discretion (although they do say that they follow the market as closely as they can AND in fact the MiFID financial directive obliges them to do this). So in practice they CAN'T quote any price they want although there are cases where a spread betting company doesn't follow the rules as applied by the industry. This means that occassionally you might find it hard to exit a trade or give too many re-quotes, freezing and such but by large things have improved dramatically over the past years and I believe this will continue as the competition increases.
3. When dealing in Shares you deal in the number of Shares not £'s per point (1000 Shares not £10 per point) although the exposure is the same. So for instance if opening a CFD position in say NEXT (NXT: LON) this would be quoted in the same way as if a normal share purchase was being made. i.e. 'buy 1000 Next CFDs' - with spread betting you are technically betting on the price movement of the share so the equivalent trade would be 'buy Next at £10 a point'
4. With CFDs, positions are denominated in the currency of the underlying asset so if you're betting on Gold, your profits or losses will be in dollars, and if you're speculating on a Swedish Share, it'll be in Swedish Kroner. If you were to place a spread bet on Gold or an overseas security your profits and losses would still be in sterling which makes spread betting more convenient for retail investors.
5. Unlike a spread betting firm which makes its money from charging a wider bid-offer spread than is available on the markets, a CFD firm charges a percentage commission on each trade (ranging from 0.1 per cent to 0.5 per cent on each trade).
6. CFD's attract financing charges. A Long position carried over to the following day will attract an Interest charge debited to your account; a Short Position will attract Interest credited to your account. Interest is calculated on the total value of your position.
The Interest rate will vary from provider to provider but as a rough guide it will be the official overnight Cash interest rate plus say 1.5% for Long positions and less 2.5% for Short Positions. So if the overnight rate is 4% you will be charged 5.5% on Long positions and receive 1.5% on your Short positions. Interest is calculated and applied on a daily basis.
(Please Note: Some Financial Spreadbetting companies offer a Rolling Cash Bet which operates a similar system, however the majority automatically close out Daily positions. Longer-term bets e.g. Quarterly, have the spread adjusted to reflect interest charges. Interest charges are often referred to as Cost of Carriage.
7. The costs of financing a CFD position, as well as commission, are not wrapped into the spread, but are charged separately. Because of this, the CFD spread quote will always be very close to the underlying price of the share or commodity you are following. So you could say CFD prices are more transparent than those for spread betting. It's easier to see where the CFD price is coming from.
8. CFDs are more flexible than spread bets, which often have set expiry dates, whereas you can let your CFD to run and run.
9. CFD's allow the owner of a Share CFD to partake in Corporate Actions e.g. Share splits, Dividends.
The owner of a Long share or Index CFD will receive dividends in much the same way as an actual shareholder but Short CFD Share and Index positions will have the dividend deducted from their accounts. (Each provider treats Dividend slightly differently so please do check.)
10. In the UK traders must pay Capital Gains Tax on their profits from CFDs for which spread bets are exempt but CFDs have the advantage that losses can be offset against capital gains from other investments. CFD's usually also allow for bigger positions.
11. You can open an advisory account with a CFD trading provider which allows your broker to give you recommendations on what to buy and sell. No such thing exists with spread betting - all providers are execution-only.
Feature CFD SB
Stamp duty No No
Capital gains tax Yes No
Margin calls Yes Yes
Expiry date No Yes, but rollovers possible
Commissions
In CFDs typically 0.10% to 0.20% of deal value
For SB, usually recovered from spread
info from CFDs and SpreadBetting Compared
