Spread betting vs. CFD trading – Which is best for you?

If you’ve got a sum of money you are looking to invest, the first thing to do is to consider the ways in which you can do this. Most people are aware of the traditional method of purchasing shares in a company, but have you considered spread betting?

When I first decided I wanted to become a trader, I wasn’t really aware that this was an option and I simply thought the only way to get involved was to enlist the services of a stockbroker and choose one or maybe two companies to entrust with my nest egg.

However, I quickly learned that spread betting offered me a number of advantages over CFD trading, but how can you know which is best for you?

Tax-free earnings

When I did a little bit of research (a good place to start is here), one of the first things that attracted me to spread betting was the fact that all profits are free from capital gains and income tax. This meant that it was a lot simpler for me to work out how much I was going to receive, especially as the company I used did not charge any fees or commission.

While this was of particular benefit to me in my situation, it does also mean that any losses you incur cannot be offset for the purposes of capital gains tax. If this is something you think you might require, traditional CFD trading might be better suited to your needs.

Smaller outlay

Although I’d built up a decent chunk of capital to invest, I didn’t really want to put all my eggs in one basket and so was encouraged to learn that significant profits are available for a much smaller initial outlay than through traditional trading.

Instead of purchasing shares to the value of your capital – for example £15,000 – you can make a number of bets using smaller deposits, sometimes as low as 30 per cent. I made use of this option and managed to make profits by closing out a number of positions. Although this worked for me, spread betting doesn’t entitle you to the perks of share ownership such as voting rights or access to dividend payments, so again, this is something you should consider.
Short positions

One of the biggest profits I made when spread betting was actually when I expected a stock to fall. Whereas traditional investors might wait until this happens, buy shares and make profits as it recovers, I took the much quicker route of “selling” the spread and making gains as the stock dropped.

I managed to close my position a little bit before the market levelled out and bought the spread as it rose again, meaning I made twice the profit I would have done otherwise.

Figures you can understand

It might not be something of importance to experienced investors, but I really struggled trying to factor in exchange rates when weighing up CFD trades. Because the three companies I was looking at were listed on the FTSE 100, New York Stock Exchange and the Nikkei, it meant I had to deal in sterling, US dollars and yen – and it all got a bit much for me.

Spread betting allows me to trade in the currency I understand best and levels the playing field, no matter where in the world you are based.

 

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