CFD trading and spread betting can appear very similar, but they also differ in a number of crucial ways, and it is these differences that can position spread betting or CFD trading as the better fit for you as a trader.

Greater London, England -- (SBWire) -- 08/27/2010 -- To the untrained eye, CFD trading and spread betting (http://www.cityindex.co.uk/spread_betting.aspx) can appear very similar. The reason for this is that they actually are very similar. They’re both margined products, they both allow you to benefit from increased leverage and they both make it possible for you to take advantage of rising or falling markets.

However, they also differ in a number of crucial ways, and it is these differences that can position spread betting or CFD trading as the better fit for you as a trader.

City Index’s Joshua Raymond sees a key difference between the pair in the fact that all profits made from CFD trades are subject to capital gains tax, while profits from spread betting are currently free from CGT. “However, you can offset losses in a CFD trade used as a direct hedge, which is why some traders prefer CFDs to hedge”.*

Another contrast is that spread bets are only ever monetised in your base currency (usually sterling), whereas CFD trades are monetised in the underlying market currency (e.g. if you trade CFDs on a US exchange, then your profits or losses will be realised in US dollars). This means that CFD trading (http://www.cityindex.co.uk/cfd_trading.aspx) can be party to currency fluctuations. Raymond explains: “For example, if you are making $500 in a CFD trade on Google, but sterling rallies 5% against the US dollar, then the amount of profit you have made when you transfer your winnings back into sterling would be worth less than it would have been when you started the trade.” It is for this reason that spread betting tends be seen as more transparent, particularly for beginners.

One final factor that can influence traders’ choices is that CFD trading, purely by definition, sounds like a much more professional trading product than spread betting.

“Of course, the products are very similar,” says market strategist Raymond. “But the name ‘spread betting’ can sometimes work to its detriment when attracting professional traders.” However, having seen the industry grow over the years to be recognised as a practical and professional trading vehicle, Raymond admits that this view of spread betting has become increasingly rare.

Ultimately, the bottom line is to consider what suits you best as a trader. One way of doing this is to take a look at your account history: whether it is spread betting or CFD trading, the market that has yielded your greatest amount of winning trades and profits is most probably the one for you. Granted, this should not stop you from investigating new markets in which you have not traded before - but then, would a Premier League manager alter his starting line up if they were on a winning streak?

The same logic could be applied to CFD trading.

That said, CFD Trading and spread betting aren’t necessarily mutually exclusive, as Joshua Raymond himself points out. “At City Index (http://www.cityindex.co.uk) you can spread bet and trade CFDs through the same platform and many of our clients do just that.” Either way, before you invest your money, invest your time into finding the right market.

Spread betting and CFD trading can result in losses that exceed your initial deposit. *Tax laws are subject to change and are dependent upon individual circumstances. For more information, visit http://www.cityindex.co.uk