This is a question facing a lot of new Forex traders. Is it better to go down the spread betting route, or the CFD’s contacts for difference route.
First of all let me explain the difference between spread betting and CFD’s.
Spread betting.
Spread betting is betting on the future value of something, it may be a stock, a currency, a commodity, house prices, an event, you can basically spread bet against anything if you broker allows it.
For example: If you believed that gold will go up in the next week, you can bet on the future value of gold by spread betting with a broker. You broker will quote you 2 prices for your bet, a price to buy, and a price to sell, the difference between those 2 prices is the spread, which is the profit made by your broker.
Lets say for example that the price of gold is 100. Your price to buy may be 101 your price to sell may be 99. So you take the buy price at 101. When gold has risen above 101 you are then in profit on your bet, and you can close your bet at anytime and take that profit. If the price falls below 101 then you will be in a loss. The price is constantly moving every second of the day and you can close your bet at anytime that your broker is offering trading in gold, which can be 24 hours per day with some brokers, (excluding weekends).
CFD’s Contracts For Difference.
Contracts for difference are similar to spread betting, but with CFD’s you are buying a contract rather than taking a bet with a broker. You can still take the same trade on gold but you are buying a contract from another trader that believes that gold will go down instead of up. The difference between the buy price and sell price of a CFD is generally a lot less than it would be for a spread bet, as you do not have to pay the buy sell spread offered by your broker.
So if the price of gold is 100 you may be able to buy at 100.1 and sell at 99.9. So you will be in profit a lot quicker by dealing in a contract, as you are cutting out the middle man which is your broker. You still need a broker to deal in CFD’s but you are dealing direct with the market, and not with your broker, so you will get a much better price for your trade. Your broker will charge you a small commission though, for putting the trade through on your behalf. Commissions vary from broker to broker, as do spreads if you are spread betting.
Pros And Cons.
Spread betting is currently tax free, but any profits you make on CFD’s are taxable.
Spread betting will cost you more initially to get into a trade, but there are no commissions to pay.
When you are spread betting you are betting against your broker, and its up to your broker whether he takes your bet or not. Your broker can sometimes refuse to take your bet if he thinks he is likely to lose on the trade.
For example: If a high number of traders are buying gold, and your broker does not have time to cover himself, he may re quote you, so you have to pay a higher price to enter the trade. This does not happen with CFD’s as you are dealing with the deep liquidity of the market, and there is always someone who will take the other side of your trade.
I trade using CFD’s and spread betting, but i only spread bet on instruments with a very tight spread, as i would rather pay a bit of commission and get a better price on my trade.
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