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CFD vs Spead Betting

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Hello,

 

Just wondering why (in the UK) you would use CFD over spread betting given you have to pay Capital Gains Tax on CFD but spread betting is tax free? 

 

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A big reason (possibly the biggest) would be the ability to trade DMA for shares, as well as trade perfectly basis the underlying when it comes to things such as hedging / strategies with other providers. 

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1 hour ago, RichB-Trader said:

Hello,

 

Thanks, not very au fait on DMA, why is this a big advantage? 

I wouldn't say it's an 'advantage' per say, but rather than if you wanted to execute significant size, or have better control over your trade execution. For example I can image the majority or trades executed by the general population are fine to go OTC directly with IG. In fact you probably get a better fill. Say theres 100 on the offer it's likely you'll be filled in significantly more size with IG as they don't need to wait for a counter to fill - they'll just book it against your account.

If you want to 'iceberg a 100,000 bid in Acme Co' or 'VWAP 50k for the session' or other complexity then you'd need DMA. For CFD trading though, if you're not having this size then the only other thing I can think of is a distrust for the broker and wanting to see the prints on exchange themselves.

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@RichB-Trader, not having to pay tax (capital gains and stamp duty) on profits from Spread Betting gives it a USP.

Don't forget spread betting is not a concept that is available in all countries around the world. For example the US does not offer Spread Betting. 

A spread bet has fixed expiration dates when the bet is placed while CFD contracts have none. 

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I used to Trade Spread Betting with IG but now Trade CFDs with IG/AU.

My main reason has to do with the margin changes that came along with ESME. I initially changed to another company based in Australia before coming back to IG and dealing through their Australian branch.

Simply put - 0.5% margin is more easily manageable than 5% margin.

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18 hours ago, TrendFollower said:

@RichB-Trader, not having to pay tax (capital gains and stamp duty) on profits from Spread Betting gives it a USP.

Don't forget spread betting is not a concept that is available in all countries around the world. For example the US does not offer Spread Betting. 

A spread bet has fixed expiration dates when the bet is placed while CFD contracts have none. 

Hello,

 

Thanks for this. For spread betting (on my demo account) all I do is close it when I have made a profit (or exceeded my allowable losses). It never seems to have expired? I have had trades from 3 hours to 4 weeks. Can you elaborate? 

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1 hour ago, RichB-Trader said:

Thanks for this. For spread betting (on my demo account) all I do is close it when I have made a profit (or exceeded my allowable losses). It never seems to have expired? I have had trades from 3 hours to 4 weeks. Can you elaborate? 

Legally, all 'bets' have to have an expiry date. For spread bets we put this as far in the future as possible - 2029 I think is the next 'expiry'. This hopefully wouldn't be an issue for anyone on the dealing platform, and is more a legal formality. 

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@JamesIG, thanks for answering. I was just about to have a go and saw your response. 

@RichB-Trader, there will be pro's and con's for both CFD's and Spread Betting. You will have to decide which is best for your personal circumstances, personality, mindset and strategy. 

I think spread betting at times gets more negative publicity than CFD's by referring that it is more for gamblers. Spread betting can be an extremely tax efficient way to trade if proper risk management is in place.

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Hello,

 

Thank you for that. Can you help me with why Spread Betting could be classed as more Gambling, given both instruments you are betting an amount on the market going up or down? Also with regards to proper risk management I assume its the same risk as CFD as if the market moves against you say 5% for the same size bet / contract you will loose the same amount? Thanks.

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@RichB-Trader

Spread betting is classified as gambling, which means people who spread bet don't pay tax on their profits. Media and publications refer to it as a form of online gambling. That is not what I am saying. It really does depend on how one uses it. I can see how many beginners or novice traders may end up using it as pure gambling. After all spread betting allows one to speculate on price movements. This in essence is a form of gambling. 

I think it is a good tool which one should have in their toolkit. If sound risk management is applied then it can be a very effective way of trading. Everyone will have their own personal views and thoughts about this. 

In the UK spread betting is regulated by the Financial Conduct Authority as a trading activity, rather than the Gambling Commission, clearly showing there may be more to financial spread betting than just pure gambling.

I have heard many professional traders call it 'spread trading' rather than 'spread betting'. Maybe IG could look into the terminology. @JamesIG, what do you think? IG the first to offer 'Spread Trading'?

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14 minutes ago, TrendFollower said:

I have heard many professional traders call it 'spread trading' rather than 'spread betting'. Maybe IG could look into the terminology. @JamesIG, what do you think? IG the first to offer 'Spread Trading'?

Sounds right @TrendFollower, as you are trading a spread rather than contracts as in CFDs.

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34 minutes ago, eaglefalcon5 said:

Glad to hear that demo accounts must close by 2029. Ig should let us know early in the process or offer a Close option.

Spread bets must be closed by 2029 rather than 'demo accounts'. As we approach the date we actually switch it so all new positions can be held longer than that (for example in 2025 we'll change the spread bet end date to 2039 or similar). Whilst unlikely, those who hold long term spreads over this time period will have options available to them at the time. I think this time round (when we had the same event a couple of years ago) we offered a spread free bed and breakfast. 

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On 09/10/2018 at 20:57, TrendFollower said:

@RichB-Trader

Spread betting is classified as gambling, which means people who spread bet don't pay tax on their profits. Media and publications refer to it as a form of online gambling. That is not what I am saying. It really does depend on how one uses it. I can see how many beginners or novice traders may end up using it as pure gambling. After all spread betting allows one to speculate on price movements. This in essence is a form of gambling. 

I think it is a good tool which one should have in their toolkit. If sound risk management is applied then it can be a very effective way of trading. Everyone will have their own personal views and thoughts about this. 

In the UK spread betting is regulated by the Financial Conduct Authority as a trading activity, rather than the Gambling Commission, clearly showing there may be more to financial spread betting than just pure gambling.

I have heard many professional traders call it 'spread trading' rather than 'spread betting'. Maybe IG could look into the terminology. @JamesIG, what do you think? IG the first to offer 'Spread Trading'?

Hello,

Thank you for your detailed reply, it was very useful. I am trying to get to the bottom of are CFD's less risky (less like gambling) than Spreadbets. I assume all things being equal, same position, bet/contract size, stops in place, risk management they are both the same risk and therefor both "gambling" to a degree. It sounds like spread betting has a reputation for people just guessing what the market will do rather than doing analysis etc, therefor it comes across as more of a gambling tool?

 

By the way I like the sound of Spread Trading!

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@RichB-Trader,

No problem.

It is not the CFD or Spread Betting that is the main risk but the asset you are trading, the capital that your are allocating to your positions, market conditions, current trends, trading strategies and your personal trading psychology and mind-set. These are what make up the 'risk conditions'.

CFD or Spread Betting is merely the instrument you are going to use to trade your chosen asset. Your risk management will be crucial. Are you going to set stop losses? If so then at what level? How are you going to determine entry position? How are you going to determine what asset to trade? Do you have a trading plan? What is the trading style you are going to adopt? How do you intend to execute your strategy in order to meet your trading objectives?

These are just some of the things you may wish to consider before making your decision. Only you can make these decisions. It will require some time, hard work, research and discipline but will assist you in building a strong foundation for your future trading experiences.

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