CFD and spread betting are both types of investment that effectively involve two parties wagering on the price movement of a stock, equity, market index or other financial asset. In both cases, neither party actually buys or sells the relevant asset. There are several key differences, including matters of taxation, legality, and market influence.
A CFD, or contract for difference, is an agreement between an investor and a CFD provider. The investor either buys or sells a position, meaning he nominates an asset and the number of hypothetical units of that asset that are covered by the contract, which has a starting price set by the CFD provider. The investor then decides when to close the position, and at this point will either pay the CFD provider or receive a payment from the provider, the payment representing the profit or loss the investor would have made on the assets given the change in market price since taking the position. The investor will have to make a deposit at the start of the agreement, and may be required to make further margin payments if the market price goes against his position such that, were he to close the position, he would have to pay a large amount to the provider.
Spread betting works on similar lines, though it can also be used for deals involving the outcomes of sporting events, specifically the score rather than the result. Because of this, although CFD and spread betting both operate on the same principle, the latter is more widely acknowledged to be a form of gambling. As with a CFD, spread betting investors can impose a stop loss or stop win, meaning the position is automatically closed if the asset reaches a certain price. This limits the potential losses or gains.
Both a CFD and spread betting are restricted in some countries. In the United States, they are both banned, but for different reasons. Spread betting is banned, as it is a form of gambling. CFDs are banned because, outside of Australia, they are not provided by a regulated financial exchange, meaning they are considered over-the-counter products: all types of OTC product are banned in the United States.
Investors in both a CFD and spread betting benefit from tax advantages in most countries due to the way they are classified as investing, gambling, or a hybrid of the two. In the United Kingdom, the only tax payable on a CFD is capital gains tax, assuming the investor has already exceeded her capital gains limit for the year. Spread betting profits in the UK are not taxed in any way, unless tax officials conclude a person has used spread betting as her only source of income, in which case the profits become liable for income tax.
From an operational point of view, the main difference between a CFD and spread betting is that the CFD is usually issued on a provider-to-investor basis, while spread betting is an agreement between two investors, facilitated by an exchange. This changes the balance of power in setting prices. A CFD provider sets the opening price on offer for a position, and the investor is limited to accepting the price or passing it up. With spread betting, the two investors can negotiate a position, and the demands of investors as a whole have more influence on position pricing.
