Spread betting is a popular way of trying to make money on the stock markets which you can use to speculate on financial markets – these include forex, indices, commodities and shares – without taking ownership of the actual underlying asset. In reality, you are placing a bet on whether you think the price will rise or fall, or you are betting on a specific rise or fall or you are speculating what the stock or share value will become within a certain timeframe.
This means that when you get it wrong, you lose the stake, because you didn't buy anything, which means that spread-betting is not trading, but betting.
Going long is a term used to describe speculating that the market price will increase over a certain timeframe, and going short or ‘shorting’ a market is the reverse – speculating that the market or stock value will decline.
Therefore, when you spread bet you are buying nothing, it is not trading or 'trading on margins' as some call it, because you quite measurably have nothing to trade. It is betting, just like a wager on a horse, and about as good-a-way to turn a profit.
There are two types of margin to consider when spread betting:
Firstly, your deposit margin. This is the amount you need to deposit in order to open the position, which is often presented as a percentage of your total trade. Perhaps a good way to think about this is that it could be considered as your 'stake' when you bet, except that you do not get it back in addition to your winnings when you speculate correctly.
Then there is you maintenance margin. A maintenance margin is the additional funds that are required if your open position (your current wager that is in progress) starts to incur losses that are greater than the initial deposit, just like when the house does not cover the difference in gambling. You’ll get a notification – known as a margin call – asking you to top up the funds, or you risk having your position closed and losing your stake.
That’s the biggest difference between betting and spread-betting is that if you keep paying your maintenance margin you can stay in the market until it starts to go your way. This makes spread-betting highly addictive. It is also highly risky, 80% of all non-professional spread-betters lose all of their deposits, maintenance or not.
CFDs are very similar to spread-betting in the way they work, but are not governed as betting in the UK but as trading. This means that they are subject to all of the taxes of successful trades, but give none of the ownership. The contract for differences itself does actually have a value for the length of that contract, which can be traded if someone lese likes your speculation. CFDs are also often tied in with large leveraging which means that you can win or lose multiples of your deposit rather than have to stake a lot of money. If you lose, you can wind up owning a lot of money you do not have. CFD trading is illegal within the United States of America, Canada and Israel.
This means that CFDs are effectively speculating on spread-betting which is, as you can imagine, a highly risky proposition.
CFD trading also requires that the investor to pay commission charges and transaction fees to the provider; whereas with, spread betting no fees or commissions are taken. When the contract is closed and profits or losses are realized, the investor is either owed money or owes money to the broker. If profits are realized, the CFD trader will net the profit relative to the closing position, minus the opening position and fees.
Profits for spread bets will be the change in base points multiplied by the cash amount negotiated in the original bet, just like with normal betting odds.
Both CFDs and spread bets should be subject to dividend payouts, assuming a long position contract. Although there is no direct ownership of the asset, a provider should pay dividends if the underlying asset does as well, as you are effectively funding their ownership. When profits are realised for CFD trades, the investor is subject to capital gains tax while spread betting profits are tax free, as spread-betting falls within bookmakers regulations.