Numerous traders and investors new to CFDs often hear the word spread talked about by their CFD provider and ask me what it means. In brief the spread is the difference between the bid and ask price of the CFD. Spreads exist across nearly all exchange traded and over the counter (OTC) products however it isn’t a term often utilized by share traders but more frequently mentioned when discussing index and forex CFDs.

The spread of equity CFDs are often the same as the spread of the underlying security over which the CFD is derived however when trading shares this is often referred to as the bid and ask price. A number of CFD providers may widen the spread of share CFDs when there is a lack of liquidity in the underlying instrument on which the CFD is derived, others may factor their commission rate into the spread. When choosing a CFD broker it’s always imperative that you make sure the spreads of the share CFDs offered are the same as the spread in the underlying equity. Often CFD providers that widen the spread of CFDs over liquid shares as well as charging a commission are earning added revenue by making the most of their client’s lack of awareness of the price of the underlying instrument over which the CFD is based.

Spreads are regularly applied to Index CFDs. The spreads applied to index CFDs work very in a different way to the spreads applied to share CFDs for the reason that a number of CFD brokers will offer CFDs over index futures contracts even when the exchange on which they are traded is closed. Often the price of an index CFD is based on the fair value of the futures contract or cash price, CFD providers will take the price of the index and add a spread which is frequently wider than the spread on the underlying index futures contract. When the exchange on which the futures contract is quoted is closed CFD providers will often widen the spread as they are unable to hedge their customer orders. The spreads applied to index CFDs will vary according to the exchange and liquidity of the underlying futures contract.

The spreads applied to forex CFDs work in a similar manner to the spreads applied to index CFDs however as the forex market is the biggest market in the world, there’s a vast quantity of liquidity and spreads are often very tight. It is important to be aware that some CFD providers will take advantage of forex traders by quoting tight spreads for small trade volumes or during quiet market periods, but widen the spread during busy periods or when the trader becomes more active. It is not uncommon for CFD providers to differentiate themselves from by quoting variable or fixed spreads, however both have their advantages and disadvantages.

When buying and selling forex CFDs with fixed spreads traders do not have to worry about being re-quoted or spreads widening over periods of high volume, they are also able to work out their profit or loss accurately without being at the mercy of the CFD provider. Trading forex CFDs on fixed spreads can be advantageous over variable spreads especially during times of volatility where providers offering variable spreads will show exceedingly wide spreads, however trading during times of low volume will cost more. Fixed spreads tend to be suited to forex scalpers or day traders who trade frequently during volatility.

Trading forex on variable spreads also offers advantages in that customers are often able to enter the market during quite times at better prices, however all traders should beware that variable spreads are not always advantageous in that should the trader wish to exit the trade the CFD provider may show a wider spread than the spread shown when the position was opened. Variable spreads are often better suited to longer term strategy traders who do not trade during volatile periods.

In conclusion it’s vital that as a newbie trader you understand how CFD companies can use the spread to their benefit. As always it is important to make sure that you opt for a CFD provider that is able to offer you CFDs that will fit your trading system as the incorrect choice might be an expensive learning experience.

Before you start trading CFDs you should understand how CFD spreads can impact your CFD trading profits, it is crucial that you take this into account prior to selecting a CFD provider.

Despite the current economy spread betting and contracts for difference (CFD) are continuously growing strong. Contracts for difference are an agreement of exchanging between two parties in an over the counter way. In the UK by hedge funds, CFDs are the preferred resource of investment because of it’s low cost of dealing. Spread betting is where you bet on an asset in the stock market and choose whether it will go up or down in the future.

Spread betting has an specific value based on the fund till the expiry date but CFDs does not get expired or more like doesnt have an expiry date. CFDs also do not have a funding charge are applied if the positions are opened and close on the same day. You do not have to pay any tax in the winnings from spread betting but with CFDs you have to pay tax at the investor’s tax rate but only after the annual allowance.

There are many financial sites you can find on the Internet where you will be able to read the differences between these two. You will be able to compare spread betting and CFDs offers within different companies. The good thing about spread betting is no matter which country’s trade your dealing in your winnings will be off the same currency you betted in, so for example if you are in UK and trading in India, US and China, you winnings will still be in Sterling. But with CFDs the winnings you get will be calculated in the currency of the country you traded in and also be taxed, for example if you are trading from US in Indian stock market then your winnings will be in Rupees not Dollars.

Reading spread betting strategies and CFDs information would be an advantages for you before starting to bet and trade. People are starting to choose spread betting over CFDs because of no tax. There are some companies that provide you free accounts when you register on their website which includes thousands of virtual money, which you can test before you hit the market.

A Contract for Difference (CFD) is a derivative that allows you to speculate on the price movement of underlying securities including shares, indices and commodities on which the CFD is based without the need to own the instrument.

In simple terms a Contract for Difference is really a temporary agreement between the buyer of the CFD and the CFD broker, with both parties taking an opposite view to whether the value of the underlying security or instrument on which the CFD is based will improve or decrease in value. CFDs are settled in the form of a cash payment that is calculated as the difference between the opening and closing price of the underlying share or instrument. If the difference is positive the CFD provider pays the difference, and the holder of the CFD will profit. Should the end result be negative, the holder of the CFD must pay the difference to the CFD broker, and the holder will incur a loss. As CFDs do not have an expiry date CFD positions can be held open forever.

The Australian Taxation Office (ATO) has published a Tax Ruling TR-2005/15 ‘Income tax – tax consequences of financial contracts for differences’, regarding the tax treatment of financial Contracts for Difference.

The Tax Ruling states that if you happen to be carrying on a business (or entering into commercial transactions) of buying and selling CFDs for the aim of profit making, any gains made are going to be regarded as assessable income and any losses incurred will be an allowable deduction. The determining issue here is whether you happen to be in fact carrying on a business (or entering into a commercial transaction) the key tests to work out this are outlined below:

* The quantity of transactions you enter into every year (e.g. on a weekly or monthly basis);
* The size and scale of your operations;
* Whether you are carrying on your activities in a systematic, organised and businesslike manner for the aim of profit making; and
* The amount of skill employed in performing these activities.

If you determine that you’re not carrying on a business (or entering into commercial dealings), any gain or loss you would usually make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are regarded as a CGT-asset, any capital gains are dealt with as assessable earnings and capital losses are usually deducted from any current or future capital gain.

As the ATO views Contracts for Difference as contracts of speculation, in that you’re effectively betting of the fact that underlying share or instrument will either increase or decrease in price, it would appear from the ruling that the aforementioned many not be relevant to CFD dealings. If so, any capital gain or capital loss you make ‘from a financial Contract for Difference entered into for the purpose of recreation by gambling’ will be disregarded under the CGT gambling exemption provision.

What this all means is that if you have made a $1,000,000 capital gain from a CFD trade and you can persuade the ATO the deal was entered into for the purpose of recreation by gambling, you might be laughing all the way to the bank. However, if the outcome were a $1,000,000 capital loss, you would lose the ability to offset the capital loss from any present or future capital gains that you have.

Because the ATO views that Contracts for Difference are predominantly entered into for an income making or gaming purpose, it would tricky for you to declare a capital loss if you could not prove that you are carrying on a business or entering into commercial transactions.

For more information on Contract for Difference tax rulings in Australia, you should seek advice from your CFD provider or ask your accountant. You will find straightforward tax guidance in the PDS issued by your CFD broker, you would have received this document before you start trading CFDs online.