Trading can be profitable. But there is a nuance: your budget is not always suitable to make money.
Leveraged opportunities offer a chance to benefit without having a large start-up capital. Traders use spread betting or CFDs as an alternative to direct investment. Many financial instruments can become assets: currencies, raw materials, and securities.
Spread betting
This allows traders to speculate on the rise or fall in the value of various financial instruments. This process is similar to sports betting when a person guesses the outcome of a football match or other sports event, which is where the name comes from. Transactions can be closed at any time depending on the amount of profit or loss the trader has made.
It is worth noting that when spread betting shares, profits are not subject to additional commission.
It is important to decide immediately on the movement of the price: if there is confidence that the price will fall, you could sell or take a short position. If you think that the price will rise, you could buy or take a long position.
Contracts for difference (CFDs)
CFD trading works in a similar way to spread betting. It is essentially a contract between a trader and a broker and the difference between the starting and ending prices of the contract will either provide a profit or loss, depending on which way the market moves.
At the same time, a trader will not physically own the asset they are speculating on. The contract does not have a specific closing date, which sets clear targets.
How are they similar?
These products are similar in several ways:
- It is not possible to speak of ownership of any asset in the main market. When trading derivatives, the user instead bets on the rise or fall of prices.
- Both options involve the difference between the opening and closing prices of a transaction.
- These methods can be used for both short-term and long-term
Profit or loss
In both cases, there is a designated margin as a deposit. Usually, these figures can be within 1%-5% and sometimes 10%-20% of the position price. If the asset is volatile, then the percentage may increase. At the same time, despite the small entry threshold that investors have and the attraction of leveraged instruments, they can claim income (or loss) as if they had invested the entire amount.
It is worth remembering that the possibility of losing money is always there. It is the trader who is responsible for the final outcome. In such situations, many use a stop-loss – a trading instrument that can be set in advance. This tool makes it possible to determine in advance the price when the asset should be sold and reduces the risk of losing all capital. However, some brokers may require additional remuneration for such a service.
What are the differences?
- We have already said that spread betting is not subject to additional commission, unlike CFDs.
- Spread betting is not taxed in any way, while CFDs are subject to capital gains tax. It’s payable on profit.
Summary
These two earning opportunities have both similarities and differences. However, it cannot be said that a guarantee of profit can be obtained using specifically one of the options. It depends on each individual trader which option is best suited for them. This entails an assessment of risks and analysis of the future situation.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
