The most widely known way to dabble in the stock market is through trading, which involves buying assets at a lower price and selling them when their value goes up.
Since your money’s growth would be exponential, the best way to do this type of investing is to put in a substantial capital.
However, not a lot of people can set aside thousands or even millions of dollars to see rapid progress in their venture. Fortunately, there are other ways for you to try your hand in investing in stocks, bonds, and other assets without spending your entire fortune.
Spread betting and CFDs can help you leverage your capital and make it grow, regardless of the amount. The two methods have a similar premise, which is to profit from the movement of an asset’s value and take advantage of the market when prices are rising or even when they’re plummeting.
If the term spread betting is causing you to worry about whether it’s legal or not, you can be assured that all processes and transactions are entirely legitimate. It’s crucial that you do your research first and answer questions, such as, “What is spread betting and CFD?” as well as, “How do they work?” before you dive into this specific type of venture.
Another vital thing to understand is the difference between spread betting and CFDs so that you can find the best method that suits your needs and investment preferences. Here are the primary differences you should know about:
Availability And Accessibility
Spread betting is only available for customers in the UK and Ireland, which limits exposure to the risks involved in using foreign currency. Meanwhile, CFD trading can be done by anyone in the world.
There’s also a difference in how you perform the trades. Spread betting is typically conducted online or over-the-counter (OTC) with the help of a broker. On the other hand, you can process CFDs yourself directly in the market, which is ideal if you want more control over your investments. Most platforms nowadays make electronic trades straightforward, so even beginners can start on this trading venture easily.
Taxes
One key difference between spread betting and CFDs is that the former is exempted from capital gains tax and stamp duty in the UK. With this, you can expect to bring home all the profits without deductions on taxes.
CFDs aren’t subject to stamp duty as well because, technically, you don’t own the asset when you open a contract. Nonetheless, you still have to pay capital gains tax, which can lower your net profit.
Commissions And Transaction Fees
Although you conduct spread betting with a broker, you don’t have to pay them a commission because they earn a profit from the spread, which is the difference between an asset’s buy and sell prices. For trading CFDs, you must consider the commission charges on your account, along with the spread fees for every order that’s executed.
Holding costs are applicable to both spread bets and CFDs. The rates may vary depending on the platform you’re using.
Profits And Losses Calculations
For both spread betting and CFD trading, you pay only a portion of an asset’s total value. With the former, you determine the difference between a stock or bond price when you opened and closed a position. Afterward, you must multiply the difference with your stake.
CFD trading also involves calculating the difference between the prices when you entered and exited the market. Then, you should multiply it with the number of CFD units you opened.
Currency Deal Sizes And Type Of Account
Since spread betting is only available for customers in the UK, the main currency for these transactions is the pound. For CFDs, you have to use the currency of the market that you’re entering.
Moreover, if you’re planning to open a corporate or professional trading account, your best bet is to go for CFD trading because you can’t get one for spread betting on most platforms.
Conclusion
Spread betting and CFD trading are two ways that you can enter the stock market without spending your entire fortune on the venture. The premise of the two methods is similar. They allow you to leverage your capital by paying only a portion of an asset’s total value while giving you the chance to earn a substantial profit.
The primary difference between spread betting and CFD trading is their accessibility and availability. The latter is exempted from capital gains tax, stamp duty, and commission, which ensures that you get a higher return for your investment.
