CFDs vs Spreads
CFDs and spreads are both derivative products preferred by many active traders. Both involve an exchange of cash between a buyer and a seller at the close of the contract. Highlighted below are key similarities and differences between these two vehicles that investors should consider before they begin to trade.
General Similarities
- Offer leverage, where an investor may take an underlying position that is a multiple of his/her trading funds. This provides the potential for magnified profits or losses compared to those from traditional trading vehicles.
- Initial capital requirement is a percentage of the total value of the position (i.e. CFDs trade on margin).
- Stamp duty is not currently required since investors do not physically own the securities.
- Buy at the offer price and sell at the bid price.
- Typical available markets are U.K., Europe, U.S., Far East, Australia.
Key Differences
|
|
CFDs |
Spreads |
|
Contract expiration |
No fixed expiry date; contracts remain open until buyer and seller agree to close the contract. |
Contracts expire at a set date or at the occurrence of a relevant event. Bets may be rolled over into the next expiry date. |
|
Capital gains tax |
Yes, at the investor's marginal tax rate once profits surpass the annual allowance. Losses can be offset. |
No - gains are tax-free, but losses cannot be offset (Please note that tax laws are subject to change and depend on individual circumstances). |
|
Placing trades |
Trades are a certain amount of shares. Cash market price-based. |
Bets are certain amount of money per point. Prices may be futures market-based. |
|
Commission |
Transparent |
Typically built into the spread |
|
Range of instruments |
Trades are focused on equity and index products. |
Bets can be placed on a wider range of instruments including bonds, options and several commodities. |
