Forex is one of the biggest financial markets of its type anywhere in the world, with in excess of $6.6 trillion now traded every single day globally.
This volume has also increased from $5.1 trillion in 2016, as the market has become increasingly accessible to part-time traders and those who want to supplement their income.
Of course, the coronavirus pandemic accelerated this trend, with many using CFDs and spread betting to trade international currencies. But which of these options is best?
What do we Mean by Spread Betting and CFDs?
The term ‘spread betting’ describes an investment vehicle through which an underlying asset isn’t bought or sold.
Instead, the trader is speculating on how they think the price of a particular market or asset class will change. They’re also given the chance to place a ‘bet’ on their chosen outcome prior to the expected movement, such as the fall or appreciation in the value of the EUR/USD currency pair.
Traders can go long (buy) or short (sell) depending on their technical and fundamental analysis, creating a scenario where it’s possible to profit even as the market depreciates in value.
While a ‘contract for difference’ (CFD) is also speculative by nature, this requires traders to enter into a contract based on the price of their chosen, underlying market.
Once again, instead of buying corporeal assets from a broker (like currency), they enter into a contractual arrangement with this entity that covers the difference in an asset’s value from the price that the contract was opened to the final price when the contract expires.
The value of a contract will vary depending on your chosen market, as will its duration and the precise markets that you’re targeting.
Not only are spread betting and CFD trading speculative and often highly leveraged (which in turn makes them incredibly accessible), but they also enable you to control disproportionately large trading positions that can deliver seismic yields and losses.
What are the Main Differences and Which Option is Best for You?
Many of the referenced differences between spread betting and CFDs are relatively small, but they may have an influence on how you choose to trade forex.
For example, while spread betting products at brokers such as Admirals are only available to residents of the UK or Ireland, CFDs can be accessed by customers on a global basis.
It’s also important to consider the impact of spreads and broker commissions. For example, spread bettors won’t pay any commission but will encounter higher spreads than those associated with CFDs (the spread describes the difference between a forex broker’s sell and buy rates during a currency exchange).
Conversely, CFDs often require you to pay a low commission on your trades (depending on your choice of broker), although typically lower spreads may enable you to compensate for this over time.
Ultimately, you’ll need to compare the precise commission fees and spreads applied by individual brokers, so that you can make an informed decision based on your strategy and chosen currency pairs.
It’s also interesting to note that spread betting profits in the UK are completely exempt from stamp duty and capital gains tax (CGT), enabling you to retain more of your profits when compared with CFD trading.
After all, CFD traders will have to pay CTG depending on how much profit they bank from their trades, although once again they won’t be hit with a stamp duty levy.
However, it should be noted that spread betting losses cannot be offset as a tax deduction if you’re a registered sole trader and earn enough to report to HMRC. The reverse is true when trading CFDs, so how you trade and your underlying tax structure will have a big bearing on your choice of investment vehicle.
The Last Word
You can also only open an individual spread betting account with most brokers, while CFD trading is more accessible and available to both individual and corporate account holders.
Ultimately, each of these factors and differences will play a role in your decision, with your tax structure, profit margin and chosen currency pairs particularly seminal considerations.
The key is to compare the market in detail and appraise each broker’s terms and conditions, so that you can make an informed decision that yields the best possible results!