Spread betting and contracts for difference (CFDs) are becoming increasingly popular tools for ordinary investors around the world.
CFDs, while they have been used by professionals at banks and hedge funds around the world for some years now, are now gaining more traction in many jurisdications as trading spreads is not allowed, including Australia, Middle East, South Africa and Europe are seeing considerable growth in CFDs, as spread betting is either not allowed or has no tax advantage.
So we thought it’d be nice to share our guide to these useful trading tools.
To start with, if you are familiar with spread betting then you will find contracts for difference (CFDs) are very similar, as rather than buying and owning a stock, index, commodity or currency, both products let you put a ‘bet’ or a ‘contract’ based on the price of that underlying security. This allows you to profit from both up and down movements in the market.
Both products are also margin products, which means you get substantial leverage or gearing on your trades and only have to put up a fraction of the full deal, enabling you to make – or lose – a lot more money. That’s why we would alwasy recommend using stop losses or limit orders.
But although they are pretty much the same, there are a few key differences.
Firstly, is pricing disparity. Although both products differ from buying shares in that instead of owning the security you make a bet or take a contract based on its price movement, if you trade a CFD its value will exactly mirror the underlying market, be that Google, Vodafone or gold. A spread bet, on the other hand, will offer a higher price, as this difference is how the provider makes its money.
And whereas spread betting firms give you a take-it-or-leave-it price like a bookmaker, allowing them to make money on the difference from the real-life spread, most CFD providers allow traders to make their own price and buy contracts within the bid-offer spread. As the bid-offer spread is the largest part of their trading costs – and because spread bets lag the movements of market somewhat – hedge funds and other professional traders prefer contracts for difference to spread bets.
To read the rest of the article (for free of course) please go to our lovely website here, where there is also an instructional video from veteran trader Vince Stanzione.
