Market volatility can sometimes be a big problem for many investors. However, there are a certain few who can turn the tides in their favour by making good use of a good pair of derivative products such as Spread Betting and Contracts for Difference (CFDs). Which of the two is the better verdict?
Basically for all purposes, the two are more similar than contrary to popular opinions. Both are derivative products which can be used to trade on live-market price movements without technically owning the principal product. The goal is basically to make accurate predictions in the market as which direction it will most likely move.
Both derivative products can purchase and short into the market and make simple profits or they can be used to hedge against losses in a much broader portfolio. Moreover, spread betting and CFDs allow investors great flexibility to make profits despite whether the market is bullish or bearish.
Moreover, both are leveraged products and that traders pay a fraction of an up-front for their contracts. The returns of their investments can be multiplied ten folds but the drawback is that they can lose more than their underlying initial investment. The difference mainly lies in tax or the absence of it. Although both exempted from stamp duty, spread betting is considered gambling and profits are still liable for capital gains tax.
Potential traders should consider how savings from taxes can fit their underlying motivation for using the products. Despite an exemption from CGTs, spread betting losses won’t be offset against taxable gains that are made elsewhere in a given portfolio, but CFD losses in contrary can.
Investors with huge portfolios who are seeking to conduct a short-term hedging plan against speculating changes in the market will later find out that CFDs are more useful than spread betting. On the other hand, the tangential speculator with a solid and confident prediction of the market moving in their expected direction will find spread betting much more appealing. In addition, spread betting is also a better option for novice traders who don’t want to worry about paying taxes.
Currency risk is another possible complication since CFDs expose investors to trade movements in currency in anything other than sterling. Spread betting is performed exclusively in sterling even when trading a foreign product therefore calculations will be less complicated.
The most crucial decision is whether to take up CFDs or spread betting and which product is much more appropriate to an investor’s trading habits. Stop-loss orders are not entirely foolproof since overnight charges tend to incur if not monitored adequately.
These products offer the chance to garner profitable advantage of market volatility, but investors must ultimately decide whether they have the determination to risk and sufficient time to take control of their trade before using spread betting or CFDs.