Finance Review

In recent years financial spread betting and CFD trading have become very popular investment options in the UK and many retail investors rushed to open accounts and exploit the benefits of leveraged trading. Despite the popularity and tremendous growth of investors it is surprising that not many traders thoroughly understand the difference between these two products as they are very similar in nature and the way the work.

So how financial spread betting is different from CFDs?

Tax Regime

Contracts For Difference are exchange traded derivatives and like any other investments are subject to UK tax regime (you pay tax on your profits and losses can be offset against future gains). Whereas financial spread betting is, as the name suggests, is spread betting and as any other betting it is tax free and your losses cannot be offset against future gains. The main thing to notice about financial spread betting is that even though it is betting it is regulated, like any other financial instrument, by Financial Services Authority (FSA).

Commission / Broker Fee

Many financial spread betting broker claim that they provide commission free trading where the real commission (or broker fee) is built into spread (they widen the spread between bid and offer quotes and that is how they make money). On the other hand most of the CFD brokers will charge you a small percentage of your trade (although most of them will have minimum and maximum commission). Thus Contracts For Difference trading offers a more transparent commission structure which is easier to understand but most of the times is higher than in financial spread betting.

Trading Mechanism

CFDs are traded on most of the stock exchanges, including London Stock Exchange and when you place a CFD order usually your broker will go on the market and fulfill your order (just like with conventional share trading). Whereas with financial spread betting your broker cannot go on the market directly as financial spread betting is not traded on the stock exchanges. In most cases your spread betting broker will try to balance buyers and traders on its own and if there is a difference than they will hedge using CFDs or futures trading.

As we can see even though financial spread betting is very similar to contracts for difference there are differences which cannot be neglected by traders and it is vital that you understand the difference to make the most of your trading experience.

To learn more about financial spread betting and CFD trading and compare and review UK brokers visit IndependentInvestor.co.uk.

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