In the present times everyone seeks sound financial planning for their investments and do not shy away from getting into new and novel investment instruments like contract for difference and spread betting. These two trading instruments might seem similar in some aspects but when examined carefully they unfurl differences which are characteristic of the two.

A contract for difference or a CFD is an over the counter agreement made between two parties which ensures that when the specified contract ends the two parties exchange the difference which would have amounted between the opening price and the closing price. Both CFDs and spread betting allow the investor to go short and at the same time since both of them are marginal products therefore both allow you to take a position which is a multiple of their funds. Since CFDs are marginal in nature and come with no expiry date therefore a daily funding charge will be applicable on the account if the investor keeps an overnight long position. On the other hand if the investor keeps a short position he gets a rebate. No funding charges are applicable if the CFD positions are opened and closed on the same day. On the other hand in the case of spread betting the spread already has a premium incorporated in it when conveyed to the customer. When spread betting the trader does not get any dividend and if there is any anticipated dividend then it is incorporated into the initial price. On the other hand in the case of a CFD the trader will receive a dividend as and when it is due to be distributed.

In the case of spread betting the trader acts more like a price taker while he adopts the role of a price maker in a contract for difference. One interesting point regarding losses is that in the case of spread betting the losses incurred by you are gone and you cannot do anything for it, while in the case of a CFD the trader has the facility to offset these losses against future profits for meeting tax purposes. Since neither CFD nor spread betting entail you to have physical possession of the stock you trade in therefore both these financial instruments are free from stamp duty. But this is not so in respect to other charges. A contract for difference attracts capital gain tax while this tax is exempted from spread betting. The margin percentage in the case of both spread betting and CFD is variable and ranges between 10-20%. Also available with both spread betting and contract for difference is the provision of stop losses. Contract for difference comes with no pre decided expiry date while spread betting has an expiry date which though has the provision of being rolled over. Long and short positions can be adopted with both spread betting and contract for difference.

This above discussion clearly indicated that there is no one right or wrong instrument to use when trading since both of them have their own peculiar features. The choice between a contract for difference and a spread bet will be made depending on the trading strategy that you as an investor would want to adopt.