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Online Spread Betting vs. Trading CFDsIn this short article I am going to briefly compare the advantages and disadvantages of spread betting with trading CFDs in the United Kingdom, the advantages and disadvantages of each may be different in other countries as rules and regulations differ. Before we go on I think I should mention that spread betting and the trading of CFDs is illegal in the United States of America. If you live in the USA you will not be able to trade these instruments. Online spread betting is illegal in the USA because it is considered to be a form of online gambling (which it is), and online gambling is illegal in the USA. Since the Republican congress and the then US President George W. Bush passed the Unlawful Internet Gambling Enforcement Act of 2006 there are no reputable online gambling/online spread betting companies offering accounts to persons living in the USA. The USA also does not allow CFDs to be traded in any form either. There are no exchanges offering a listed contract for difference in the USA and there are therefore no legal CFDs in the USA. If you live in the USA, you will NOT be able to trade CFDs or open accounts with online spread betting websites. From what I read, the law over there simple does not allow it and the law has real teeth. In the UK, a stamp duty of 0.5% on all share purchases prevents day trading shares from being cost effective; however, fortunately for day traders, both spread betting and CFDs are currently exempt from stamp duty and provide day traders with a way to day trade based on the price of the underlying shares. The costs of trading CFDs are usually lower than the costs of trading using online spread betting. With CFDs trading costs are usually around 0.1% of the value of the instrument or less, the costs of spread betting are usually slightly higher and are recovered through the spread. Unlike spread betting, CFDs do not have an expiry date and a daily funding charge is applied to long positions held overnight, short positions held over night attract an interest rebate. With CFDs you will also attract any dividends that would have been paid on the actual underlying shares too if you are holding a long-term long position. Whilst spread bets have an expiry date you can usually role the bet over at a cost when the bet reaches its expiry date if you want to continue. Spread betting winnings are currently exempt from taxation in the United Kingdom – winnings from trading CFDs however are subject to capital gains tax. With capital gains tax your losses may be able to be offset against other gains, but a loss incurred though a spread bet is money lost forever. If you're placing a spread bet in the UK on an instrument quoted in British Pounds then there is no currency risk, but CFDs are usually quoted in their underlying currencies. For example, oil is usually quoted in US dollars. Say the price of oil was rising and the value of the US Dollar against the British pound was falling and you traded oil using a CFD. In this example your winnings could be diminished (or even wiped out) due to the falling value of the US Dollar if you were long, or your losses would be magnified if you were short. Trading CFDs can therefore be a little more difficult than trading using an online spread betting site as with CFDs currency fluctuations also need to be taken into account. |
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