Spreadbetting v. CFD

fltbear

Junior member
Can anyone help please with the practical differences between spreadbetting and CFD?

With D4F there appear to be 2. First ones deposited cash is merged with CMC's funds in a CFD account whereas it is held separately in a SB account. Bad news for CFD if CMC becomes insolvent Second, SB gains are not taxed (unless a trade or profession) whereas CFD gains are subject to CGT.

Is there any difference between the 2 in terms of spread, bias or any other potential manipulation by D4F or are the quotes identical?

Any enlightenment gratefully received
 

Trader333

Moderator
I asked this question of D4F and the answer is that the spreads given on CFDs are the same as those for spreadbetting. The reason why CFDs exist on D4F as well as spreadbets is for customers living in the US or other countries where spreadbetting is not permitted. The spreads were not always the same for CFDs and spreadbets but now they are so if you live in the UK and prefer a spreadbetting company to a direct access account, go for the spreadbet account as tax is not payable on gains.

Cheers


Paul
 

mmillar

Guest
Good answer Trader333 :)

Following on from that, does anyone know what the legal/regulatory differences are between a CFD and a spreadbet. It's always intrigued me that a 'CFD' pays tax and a 'spreadbet' does not, when to all intents and purposes they are the same (for UK citizens anyway). Any tax lawyers out there?

cheers
 

The Optimist

Junior member
I am not a Tax Lawyer. I think the difference is in terminology rather than practicality.

Spread Bet is a game of chance and therefore not taxable so ideal for countries like UK where betting is allowed.

I live in Texas, USA, where betting is strictly forbidden (OK to shoot people though), therefore I can only trade CFD's.

In practice they are the same.
 

mmillar

Guest
Optimist

lol. maybe a combination of trading and shooting people? Spread-Shooting? Contracts For Death? Level 2 Executions? The Texas Chainsaw Stop-Loss?


There must, however, be differences in British Law - or regulatory requirements from the SFA - that specify the differences between spreadbetting and other forms of trading.
 
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cassiopeia

Active member
Following on from that, does anyone know what the legal/regulatory differences are between a CFD and a spreadbet. It's always intrigued me that a 'CFD' pays tax and a 'spreadbet' does not


With CFD funds the deposit/margin is mixed with the companies account so if they become insolvent you are only treated as a creditor. With spreadbetting you are covered under the UK investors compensation scheme up to a limit, as with conventional sharedealing. So in practice spreadbetting it is less risky than CFDs if it were not for the spreads and bias.

I understand the betting tax which was originally paid by the punter is now levied on company profits, however they will wish to pass this on of course, hence it is still paid indirectly by the punter.

Except for this there is little to choose between a rolling spread bet like deal4free offer and a commission free CFD like idealing offer except the terminology. I am not sure if this is what defines the difference.

Of course trading and investing are games of chance under a different name, the only thing that matters is the quality of research and how you handle your money. Certainly the tax treatment of these products is a potential hornets nest especially if Mr IR tries to get two bites of the profits.
 
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mmillar

Guest
With Globex down I decided to do some research for myself. Still haven't found out exactly what makes a spreadbet a bet and a CFD not, but I've found some interesting :confused: stuff if anyone wants to know...


Some basic legal stuff on spreadbetting

http://www.ateonline.co.uk/default.asp?showid=13&pageid=1160


Some financial ombudsman case studies re spreadbetting

http://www.financial-ombudsman.org.uk/publications/ombudsman-news/investment/cs-spread-may.htm


Section of the Budd Report on spreadbetting – basically just says that SBs should be regulated by the FSA (choose Chapter 27)

http://www.culture.gov.uk/global/publications/archive_2001/gamb_rev_report.htm


Discussion paper from FSA on ‘best execution’. Basically just says spreadbet companies are excluded from the ‘best execution’ rules. (Chapter 10)

http://www.fsa.gov.uk/pubs/discussion/dp5.pdf
 
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I must admit I was rather gobsmacked after reading the Financial Ombudsman link - relating to Mr G who contacted the Financial Ombudsman after he had run up trading losses of £110,000 with three separate firms. He was concerned that he had been able to open accounts with these firms despite having no history of trading in such areas, and he thought the firms should be required to compensate him for his losses.

His letter stated: ‘I have to think very deeply about how I find myself in this position when I have never ever had any experience of either gambling or trading of any kind. In fact my investment profile has always been that of life savings held in unit trusts and just a dabbling in individual shares and warrants. I made no attempt to conceal either my ignorance of this form of equity exposure or the fact that I was a complete novice in this area. Nevertheless, I was able to open up extremely large positions even though I was obviously totally unable at the time to estimate the extent of my exposure and clearly had no trading experience or skills to manage these positions.’

‘I believe I was swept up in the hype of the market like many, but also had the misfortune to fall into a sophisticated marketing and PR campaign promoting spread betting to retail investors as a tax efficient way of gaining equity exposure.’

Hmmm ... words fail me!
 

Trader333

Moderator
With idiots like the above described by Skim, things may get much worse for all traders in the UK. There is the possibility that "Execution Only" brokers will not be allowed in the near future for all but a few traders. This would increase costs, delay the implementation of trades as well as a whole host of other undesirable aspects to trading. At the moment it is only being discussed but with more cases similar to the above coming out it may tip the balance in favour of the bureaucrats.

Personally I very much hope not


Paul
 

FTSE Beater

Experienced member
Hi all

This is very worrying - what you will end with is the same situation that is already happening in the golfing community and to some extent the housing market.

If you only take on people with a good track record - how do you get a track record. You end up with, as trader333 has stated, a group of elite traders with no-one else being aloud to join the group. Who will the elite traders take profits from - the institutions. :!:

It's a viscous circle with no-one way out :devilish:

Just my thoughts
 
Nah FB, all UK traders with any common sense (Mr G excluded) would rush to trade US stocks instead, and the Government would be denied their 0.5% stamp duty!
 

FTSE Beater

Experienced member
Good thinking Skim :)


As a side thought, if Mr. G lost £110K with 3 companies, he would have needed to put down something like a £60K deposit!!!! £60K into something he knows nothing about - I need his phone number, I've got a few trading systems to sell him :cheesy:
 
I'm sure there's an award we could nominate Mr G for - something like the Darwin Awards but for those still in the land of the living?

www.darwinawards.com
 
Guys,
At the end of the day Mr G was obviously a complete muppet as the only way you win on something like spreadbetting is by having someone else lose.
Do you really think that the spreadbetting company is losing money? I think not!
If legislation cuts all of the mugs out of the game then the MMs/ spreadbetting companies, etc will make the game harder by increasing the cost to trade (widen the spread, increase the commission).
I honestly hope the guy gets his money back but he should do it the hard way like most people - how many people started trading and immediately turned over a profit?
Just my thoughts.
I.T.F.Daddy
 

JonnyT

Senior member
<i>As a side thought, if Mr. G lost £110K with 3 companies, he would have needed to put down something like a £60K deposit!!!! £60K into something he knows nothing about - I need his phone number, I've got a few trading systems to sell him </i>

Beat you to it. It must have been one of mine to have lost so much ;)

JonnyT
 

Trader333

Moderator
Skim,

My understanding of this is that if this legislation comes in then wanting to trade the US would not make things any better. In the same way that US citizens are not permitted to place spreadbets, UK citizens would not be permitted to place execution only trades regardless of where the broker is located.

I may have miunderstood this but I dont think I have.


Paul
 

ChartMan

Legendary member
Re this Mr. G...... hehe. I think I'll just pop down the bookies and put £50K on "Mr Lucky" to win at Ascot today. Not that I know ANYTHING about horses, still, that doesn't matter does it.
And when it comes in last, I can get my money back if I tell the Bookie I'm a beginner and I didn't know my horse only had 3 legs.
 
I may be wrong here but another practical difference might be that where with CFD's you are able to trade in numbers of shares ie. buy or sell X amount of shares, with spreadbetting you are having to bet per point. For smaller accounts, it can make execution of all but the simplest of strategies near to impossible. The novices that make up the majority of these accounts will be unable to practically experiment with more sophisticated trading systems and thus their learning is hindered. I have quickly done the maths for a couple of trading systems and both weren't executable using the "per point" spreadbetting system.
Another thing to remember is that if spreadbetting contributes a significant amount towards your income, then you will be taxed on it anyway.
 
A

aussietrader

it is the same

Warm machine,

it makes no difference if you are trading per point or per share. A $10 per point bet is equal to trading 1000 shares. Each point (cent/pence) the shares move makes or loses $10. Similarly, a $100 point spreadbet is like trading 10000 shares.

Cheers

Aussie

(look on the bright side and be grateful you are not a West Indian cricketer) :cheesy:
 
 
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