Are CFDs better than spread bets?

Sooner or later most spread betters will come across a similar product – the contract for difference, or CFD – and wonder whether they’d be better off using it. After all according to Investment Trends, quoted in City AM “62% of CFD traders claim gains in the last twelve months”. For spread betting the equivalent figure is just 50%. So should you switch to CFDs?

At first glance there’s little difference. Like a spread bet a CFD lets you go long or short (bet on rising and falling prices). It’s also margined – so a small deposit gets you a lot of exposure to an underlying asset. However a closer look reveals some differences too.

The big one is tax – CFD profits are taxable whereas spread betting gains are not. That might seem like a big drawback but there’s a flipside – losses on CFD trades attract tax relief whereas spread betting losses don’t. Then there are charges – spread betting providers take their cut via the bid to offer spread. CFD providers on the other hand also levy a spread but charge a financing cost on top. In short a long CFD is in effect like borrowing an asset in order to bet that it will rise in price. Your broker – the lender – will expect to earn money for lending you the asset.

So which is best? For novices we still prefer spread bets. The charging structure is simpler as is the tax treatment. And in the forex market in particular they are still preferred by most traders for being the cheaper option. As for those extra profits claimed by CFD traders, as Ian O’Sullivan of Spread Co puts it “CFD traders tend to be an older, more mature, more long-term type of trader”. Tellingly he also notes something I regularly warn about too – they have more patience “giving themselves a chance of turning a profit”. So rather than change products if you are losing money regularly, try changing the way you think instead.