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(1)
- 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.(2)
- 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(1)
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CFDs |
Spreads |
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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. |
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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 (tax laws are subject to change at any time). (2) |
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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. |
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Commission |
Transparent |
Typically built into the spread |
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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. |