With the European debt skyrocketing to its record peak along with the China’s mounting inflation and the Federal Reserve’s never ending loan to the rest of the striving world, things are less desirable in the economic world.
Ordinary investors see volatility in this case not very friendly and most of the people involved in trading are risk averse and are apprehensive in looking at their stock portfolio crumbling in value on certain days despite the fact it will become stable after. Although the majority of traders loath volatility there are a certain few who rejoice in it.
They are considered a distinct and a class of their own. A few reside in gleaming hedge fund firms while others prowl in the dark corner of the room. Both classes are brought together by their prowess in using contracts for difference (CFD) and spread betting to profit albeit price fluctuations. Both CFDs and spread betting are identical and are derivative products therefore investors don’t actually have any rights to the underlying product.
A lot of providers offer both derivative products. The most central distinction lies in taxation. Spread betting is legally referred to gambling hence, winnings are exempted from capital gains tax. CFDs on the other hand have profits that are directly payable although losses can be written off against profits taken from other sources.
For newbie’s who are relatively new to trading, spread betting is the best option since they basically don’t have to worry about taxes. CFDs however are instinctively used by experienced investors who will most likely use them for hedging or other things. The question on which product is more applicable to use is highly dependent on investor tax status.
Basically if you have a hefty stock portfolio and you want to utilise the derivatives to hedge against unexpected shifts then you would most probably want to use CFDs since you will be able to write off losses on one side against profits. For those who are more devoted to simply trade and make a profit based on speculating and predicting outcome of the market therefore spread betting should practically make more sense.
Another reason why spread betting is more popular is the absence of currency risk. If you are trading CFDs then you are most likely exposed to a lot of currency risk on shares or assets that are almost entirely denominated in sterling which in the long run proves to be quite difficult to tone down. When using spread betting positions that are all properly placed in sterling and adjusted per point even when trading foreign equities, currency risk is not much of an issue.
Spread betting and CFD trading are both highly risky derivative investments and traders are not in direct control of the underlying shares although the chance to leverage up can be very impressive. For the majority of retail investors, the use of spread betting is essentially the better option to CFD trading but it will all depend on individual conditions. With the turmoil plaguing the economic scene analysts are encouraging investors to try one of the two.