What is the difference between Spread Betting on Financial Markets and CFDs?

Answer 1

CFDs are Contracts For Difference. In a nutshell, it is an agreement between you and your broker to settle the difference in your buy and sell prices instead of having to buy the stocks and then sell them (or to short the stocks and then having to buy them back.) It is a legal instrument which is frequently used as a convience tool to bet on the bear side in place of shorting a stock.

Spread Betting works almost the same way except that it is still very gray in many countries and is mostly conducted between you and your broker without any regulation from the local exchanges. It therefore cannot be technically known as a legal financial instrument.

If you ask me how does all that difference affect small retail investors? Frankly, it does not make much of a difference to small retail investors.


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Answer 2

With Spread Betting, you purchase one security and short another. With a CFD (which is illegal in some countries, including the USA), you are essentially making a bet on the difference between those two securities.

At first, it appears that there should be no difference in the payoff. However, there are differences:

1. The cost of carry is higher in betting the spread. There is generally some cost associated with shorting securities (this is typically minimal with stocks and greater with other securities).

2. CFDs do not have to follow any short sale rules. The up-tick rule will not apply.

3. CFDs might not move the market. If you are doing a large deal, then buying or shorting a large position could move the market. This doesn't always happen with CFDs (though it could if the other side hedges by entering the market -- but they should move the market in your favor, not against it.

4. CFDs should have substantially lower transaction costs.

Answer 3

Not a lot, really, at least in terms of the maths.

The CFDs are traded through a more transparent market and probably covered by a body such as the FSA, whereas in Spread Betting you're on your own - you're dealing with a bookie not a bank. But spread betting probably allows you more flexibility in terms of the size of contract etc.

Personally I don't like any of these "zero sum game" financial products - the only people who consistently make money at them are the market-makers.

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Answer 6

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