Are CFDs better than spread bets?

By Deputy editor Tim Bennett Apr 12, 2011

Tim Bennett

Share with
friends:

Comments (5) Print this article

Sooner or later most spread betters will come across a similar product – the contract for difference, or CFD – and wonder whether they'd be better off using it. After all according to Investment Trends, quoted in City AM "62% of CFD traders claim gains in the last twelve months". For spread betting the equivalent figure is just 50%. So should you switch to CFDs?

At first glance there's little difference. Like a spread bet a CFD lets you go long or short (bet on rising and falling prices). It's also margined – so a small deposit gets you a lot of exposure to an underlying asset. However a closer look reveals some differences too.

The big one is tax – CFD profits are taxable whereas spread betting gains are not. That might seem like a big drawback but there's a flipside – losses on CFD trades attract tax relief whereas spread betting losses don't. Then there are charges – spread betting providers take their cut via the bid to offer spread. CFD providers on the other hand also levy a spread but charge a financing cost on top. In short a long CFD is in effect like borrowing an asset in order to bet that it will rise in price. Your broker – the lender – will expect to earn money for lending you the asset.

So which is best? For novices we still prefer spread bets. The charging structure is simpler as is the tax treatment. And in the forex market in particular they are still preferred by most traders for being the cheaper option. As for those extra profits claimed by CFD traders, as Ian O'Sullivan of Spread Co puts it "CFD traders tend to be an older, more mature, more long-term type of trader". Tellingly he also notes something I regularly warn about too – they have more patience "giving themselves a chance of turning a profit". So rather than change products if you are losing money regularly, try changing the way you think instead.

Comments (5)

Published in CFDs explained | More articles by Tim Bennett

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Alex

    (13 April 2011, 05:21PM)  Complain about this comment

    Last 3 lines are absolutely spot on. The biggest tip I'd give any new spread better is treat it like fully margined investing, and be patient. Let the market come to you, don't chase all over the place or you'll just end up over trading and loosing your margin.

  • 2. Timbo

    (14 April 2011, 05:14AM)  Complain about this comment

    Having tried both, I do find that I am happier using CFDs as they seem to track the price of equities much closer than the SBs - very similar in fact to that of a normal broker. In this respect I found IG Markets to be my preferred platform.

  • 3. chris

    (14 April 2011, 05:29PM)  Complain about this comment

    I still don't know what the difference is apart from the tax point of view. You are also misleading - long spredbets do charge interest as well. And if you make money in long run, why would you want to pay CGT? Funy how most articles on here ask the question but often don't answer it properly, if at all

  • 4. Tim

    (15 April 2011, 09:48AM)  Complain about this comment

    Chris - the question about CGT doesn't have one answer. It depends on whether the ability to create and use a CGT tax loss matters to an investor or not. If it does (if you are using the product as a hedge for example and may even be expecting to lose money on the hedge leg of a trade, you probably want CFDs. But for most investors spreadbets are the better bet. The mechanics of spread bets and CFDs are similar I agree but the charging structure is different. Spread bets usually include interest within the bid/offer spread whereas with a CFD it's more transparent.

  • 5. share tips

    (28 May 2011, 01:08PM)  Complain about this comment

    I like your post and it really gives an outstanding idea that is very helpful for all the people on the web. Thanks for sharing.
    Stock Tips

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


>