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CFDs vs spread betting: What’s the difference?
Both investments let you earn money by correctly predicting stock price movements—but there's a high risk of loss.
Contract for differences (CFDs) and spread betting can potentially yield higher returns than regular stock trading, which makes these types of investments attractive to experienced investors.
CFDs and spread betting allow you to benefit from any change in an asset’s value, whether it be positive or negative. Another big draw is that you don’t need to pay the full value of either investment upfront. But that’s also why CFDs and spread betting are very risky.
What are CFDs and spread betting?
Before understanding the difference between contracts for difference (CFDs) and spread betting, you first need to know what they are.
Spread betting is when you bet on the movement of an asset’s value. It’s like betting on the name of the next royal baby or whether a novelty song will hit number one on the charts. But with spread betting, the outcome can only be 1 of 2 possibilities: the value will go up, or it’ll go down.
When spread betting, you bet per point that an asset moves. For example, instead of saying, “I bet $5 that Apple’s stock price will go up,” you say, “I bet $1 for each penny that Apple’s stock price goes up.” If Apple’s price moves up, you get $1 for every penny that it increases. If the price moves down, you lose $1 for every penny that it decreases.
Contract for difference (CFD)
With contract for differences, you similarly bet on the movement of an asset’s value. The amount you gain or lose depends on the degree to which your prediction of an asset’s future price is right or wrong.
Here’s how it works. A buyer agrees to pay a seller the difference between an asset’s current value and it’s value at a prespecified time in the future. If the price goes up, the buyer makes money and the seller loses money. But if the price goes down, the buyer absorbs the loss and the seller earns a profit.
At no point do either the buyer or the seller actually own the asset on which they’re betting. Just like betting on a race horse doesn’t mean you own that horse, betting on an asset’s change in price using a contract for difference doesn’t involve owning that asset. You’re simply gambling on its change in value. You get rewarded for betting correctly, but you pay for making bad predictions.
Point-by-point comparison of CFDs and spread betting
|What it is||Betting on the movement of an asset’s value (the exact amount at which an asset’s price will go up or down).||Betting on the degree to which you’re right or wrong in predicting an asset’s future change in value.|
|How it works||You choose how much money you’ll bet per point of movement.||You agree to pay the difference between an asset’s current value and its value at a prespecified time in the future. Contracts are worth a fixed value, and you choose how many contracts you want to trade.|
|Trading hours||For forex and indices, you can deal 24 hours a day. Other markets allow you to deal during market hours.||For forex and indices, you can deal 24 hours a day. Other markets allow you to deal during market hours.|
|Is there an expiry date?||Yes||No, but you may pay an interest fee for holding onto a CFD.|
|Dividends||You don’t own the asset on which you’re betting, so you aren’t entitled to any dividends the stock generates.||You don’t own the asset on which you’re betting, so you aren’t entitled to any dividends the stock generates.|
|Are earnings taxable?||No capital gains tax.||Included in calculation of capital gains or losses. Profits are part of your taxable income but can be offset by losses.|
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