The Business of Forex Trading – Spread Betting vs CFD Trading

The forex market is one of the biggest and most lucrative financial markets in the world, with this boasting a daily turnover in excess of $6.6 trillion globally and a cumulative market value of $2.409 quadrillion.

The size of this market is continuing to grow annually, with the forex market benefitting from its innate flexibility and the opportunities that it presents to traders in terms of leveraging volatility to their advantage.

Even in a strained macroeconomic climate with different factors what cause inflation, forex offers a viable vehicle through which you can access both short and long-term gains. You can also trade forex through vehicles such as spread betting and CFD trading, and we’ll explore both of these entities in more detail below.

What is Spread Betting?

We’ll start with spread betting, which is inextricably linked to both forex trading and sports betting.

With this investment vehicle, traders aren’t actually buying or selling an asset, but instead speculating on how they think the price of a particular market or underlying asset will move. Traders are then given an option to place a bet size per point the market moves, usually within a predetermined period of time.

For example, if you believe a chosen currency pair (such as the GBP/USD) will rise, you could buy or establish a ‘long’ position. If you subsequently use a bet size of £10 per point, then each point that the currency pair moves in the forecasted direction will result in a £10 profit.

What is CFD Trading?

CFD (or contract for difference) trading is an investment vehicle that’s also based on the price and subsequent movement of an underlying asset class.

Once again, instead of buying physical assets from a broker, you can enter into a CFD that covers a predetermined period of time. The terms of this are designed to exchange the difference in the value of an asset from the price of contract at the time of its inception to the date when it’s ultimately closed.

Your CFD will vary depending on the market you’re trading, but once again, it enables you to speculate on the price direction of target currency pairs within a predetermined period of time.

Because of this, you can also fully utilise leverage to open positions that are disproportionate to your deposit value, which can increase your potential gains and losses depending on how the market moves.

What are the Core Differences Between Spread Betting and CFD Trading?

Spread betting and CFD trading are both speculative forex trading vehicles, which enable you to trade price movements without assuming ownership of the underlying asset. Because of this, they both enable you to go long and short on forex, which is ideal in a strained and volatile macroeconomic climate.

You can also deploy both vehicles on forex and a much wider range of markets, including stocks, indices, commodities and cryptocurrencies.

In terms of the core differences between these two investment vehicles, spread betting is only available to residents of the UK and Ireland. Conversely, CFD trading is available to customers on a global basis, making it a more accessible and better-known vehicle overall.

In terms of trading commissions, there are none associated with spread betting, although this investment vehicle boasts typically higher spreads than CFDs. The spread describes the difference between the bid (sell) price and the ask (buy) price of a currency pair, so it’s a key consideration when looking to optimise your potential returns.

In the direct comparison between spread betting vs CFD trading, we can also see that any profits derived by the former are completely exempt from stamp duty and capital gains tax (CGT).

Conversely, your CFD trading profits are subject to CGT terms, although you won’t have to pay any stamp duty on earnings derived through this investment vehicle.

When it comes to losses, however, such entities can be offset as a tax dedication when engaging in CFD trading. The same cannot be said for spread betting, where your losses cannot be offset and must be absorbed completely.

On a final note, brokerage sites tend to offer individual spread betting accounts to sole traders (but not corporations). However, CFD brokers provide both individual and corporate accounts to a global audience, so it’s a more viable and accessible option for institutional investors and hedge fund managers.

As we can see, there are both similarities and differences between spread betting and CFD trading, creating clear and unique selling points depending on your investment strategies, starting capital and underlying appetite for risk.

You can use these factors to ultimately make an informed decision when trading forex, potentially optimising your returns and tax circumstances in the process.

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