Comparing CFDs and Spread Betting
CFDs (Contracts for Difference) and spread betting are both financial derivatives that allow traders to speculate on price movements without owning the underlying asset. However, they have distinct characteristics.
Basic Concept
Spread Betting
You bet a specific amount of money per point on whether a market will rise or fall.
CFDs
You buy or sell contracts that represent a predetermined value in the underlying market.
Position Types for Both
Long Position
Open when you expect the price to rise
Short Position
Open when you expect the price to fall
Key Differences
Structure
CFDs involve trading standardized contracts, while spread betting is based on betting per pound on price movements in points
Taxation (in the UK)
Spread betting profits are typically tax-free, while CFD profits may be subject to capital gains tax (for further information contact your tax advisor) * Tax laws are subject to change and depend on individual circumstances.
Spread betting is for UK clients
Both methods offer leverage and the ability to trade various markets, but they differ in structure, profit calculation, and tax treatment. The choice between CFDs and spread betting often depends on individual trading preferences, tax considerations, and regulatory environment.
CFDs
Forex CFD Trade Example: EUR/USD (Micro Lot)
Currency Pair: EUR/USD
Position Size: 0.01 lot (micro lot = 1,000 units)
Initial Exchange Rate: 1.2000
Pip Value: $0.10 per pip for a micro lot
Scenario 1
Price Increases by 5 Pips
1. Open a long position (buy) at 1.2000
2. Price moves up to 1.2005 (5 pip increase)
3. Close the position at 1.2005
Calculation:
• Pip movement: 1.2005 - 1.2000 = 0.0005 (5 pips)
• Profit: 5 pips × $0.10 per pip = $0.50 profits
Scenario 2
Price Decreases by 5 Pips
1. Open a long position (buy) at 1.2000
2. Price moves down to 1.1995 (5 pip decrease)
3. Close the position at 1.1995
Calculation:
• Pip movement: 1.1995 - 1.2000 = -0.0005 (5 pips)
• Loss: 5 pips × $0.10 per pip = $0.50 loss
• A 5-pip move in either direction results in a $0.50 profit or loss when trading 0.10 lot (micro lot) of EUR/USD.
Spread Betting
Forex Spread Betting Example: EUR/USD Trade Details:
Currency Pair: EUR/USD
Stake Size: £0.10 per pip
Initial Exchange Rate: 1.2000
Scenario 1
Price Increases by 5 Pips
1. Open a long position (buy) at 1.2000
2. Price moves up to 1.2005 (5 pip increase)
3. Close the position at 1.2005
Calculation:
• Pip movement: 1.2005 - 1.2000 = 0.0005 (5 pips)
• Profit: 5 pips × £0.10 per pip = £0.50 profit
Scenario 2
Price Decreases by 5 Pips
1. Open a long position (buy) at 1.2000
2. Price moves down to 1.1995 (5 pip decrease)
3. Close the position at 1.1995
Calculation:
• Pip movement: 1.1995 - 1.2000 = -0.0005 (5 pips)
• Loss: 5 pips × £0.10 per pip = £0.50 loss
• A 5-pip move in either direction results in a £0.50 profit or loss when spread betting on EUR/USD with a £0.10 per pip stake.
• The profit/loss is calculated in the currency of the stake (GBP in this case).