Both CFD trading and spread betting involve trading the markets
If you’ve interested in the world of finance and trading, you’ve probably heard about forex markets and how fast they move. You might have also heard about contracts for differences (CFDs), which enable traders to access various markets and leverage their movements. CFDs help traders with small capital to tap opportunities in different markets such as forex, stocks, and others. Have you heard of spread betting, though? It is another popular way to trade those market moves.
Similarities between spread betting and forex trading
There are several similarities between spread betting and CFD forex trading (or any other type of CFD, for that case). The first is that they are both derivative products. In spread betting, you are actually buying a bet (upwards or downwards) on the movement of the price of a specific instrument, such as shares or forex pairs. In CFD trading, you own a CFD contract, but not the actual product.
For example, holding a USDEUR CFD contract is not the same as buying and later selling US dollars in exchange for euros, but you are subject to the same price fluctuations. Same goes for spread betting on the USDEUR exchange rate. In other words, you can profit or lose from the change in the relative value of the US dollar against the euro, without actually buying or selling any dollars. Use your broker’s trading platform to check currency market movements and determine when you want to enter and exit your trade. In both instances, the direction of the price movement impacts your outcome, depending on whether you are long or short (buying or selling).
The second similarity is that both are margin-based products. Those products are catered to trades with small capital. Whether you bet on the movement of the price of the US dollar against the euro through a spread bet, or whether you buy a USDEUR CFD contract, you will eventually pay less than if you had bought or sold physical dollars against euros. Financial leverage enables you to trade with a larger capital than you have, and it is available in both. This also means that there are overnight charges in both types.
The third similarity is that there is no predetermined amount of money to earn or lose. If you have bought a CFD contract on USDEUR, and the price appreciated, you can close the contract on a profit and that profit (or loss, if the price depreciated) varies depending on how much the price has changed. The same applies to spread betting, wherein your profit or loss is determined by how much the price has moved and in which direction.
Differences between spread betting and CFD forex trading
Forex trading does not have a time limit
The first difference between these two options is the ownership. Even though in CFD trading you do not actually own the asset, you still own the CFD contract which is usually between you and the broker. In spread betting, you do not own an actual instrument or contract, you are just betting on price movements, and your profit or loss is determined by the outcome of that bet.
The second difference is that with CFDs you do not have a time limit on the contracts, whereas in spread betting there is a defined period of time for the bet to expire. You can choose to close those bets or keep them open within that time limit.
CFD forex trading and spread betting have similarities and differences, but spread betting might be less advantageous for you, mainly because of time limitations. This can make it more challenging if you prefer to keep trades open for longer periods of time.