CFD Trading vs Spread Betting

The CFD trading vs spread betting debate is an interesting one. Both are leveraged instruments, but the tax treatment, amongst others, is not the same. Here we’ll explore the differences between trading CFDs and financial spread betting. We’ll finish by considering which product may best meet your needs.

Quick Overview

Before we consider how they vary, what exactly are contracts for difference (CFD) and spread bets?

CFD Trading Explained

With online CFD trading, you’re speculating on and exchanging the difference in price between the open and close of a contract. You buy and sell at any time and can use leverage to multiply results. Importantly, you never own the underlying asset. Your trade size is the number of units/CFDs you buy.

For further guidance on CFD trading, including strategies and brokers, see here.

Spread Betting Explained

With spread betting, you simply speculate whether the price will go up or down. Your position size is the amount you bet per point of movement. For example, let’s say you thought the price of the EUR/USD was on the up. If you bet £5 per point on the currency pair, you’d receive £5 profit for each point the price climbed. Likewise, you’d lose £5 for each point the price declined.

For further guidance on how to start spread betting, including top providers, see here.

CFD Trading Vs Spread Betting

Similarities

In many ways, spread betting and CFD trading are similar:

  • Leverage – Both are leveraged products, meaning you can substantially increase your position size with a small deposit. You’ll often be able to take a position with just a 5% margin. With that said, spread betting and CFD trading finance vary between providers. Fortunately, a margin calculator can be found on most platforms.
  • Market access – With both you can invest in thousands of markets, from stocks and shares to forex, cryptocurrencies, gold, ETFs, futures, and options. Users of both products can also expect around the clock access to global markets.
  • Derivatives – With both CFD trading and spread betting, investors do not own the underlying asset.
  • Long & short – You can take long and short positions with both instruments.
  • Platforms – The best financial spread betting and CFD trading platforms are available on desktop and mobile apps, and include popular systems, such as MetaTrader 4.
  • Demo accounts – Regardless of whether you choose to start CFD trading or spread betting, most providers offer a demo account. A trial account lets you practice the basics before you invest real money.
  • Education – There are ample online resources available for both spread betters and CFD traders. Check out videos and virtual courses for help with definitions and trading tips. Blogs and forums can also be a great way to see experts swap advice on how profitable CFD trading and spread betting works.
  • Short-term vs long-term – Both instruments are suitable for day traders and short-term investors. They are, however, less effective as long-term investment vehicles.
  • Holding costs – On most spread betting and CFD trading platforms there are holding fees.

Differences

So what is the difference between CFD trading and spread betting? Key distinctions include:

  • Tax – The tax implications of spread betting vs CFD trading is the main difference. With spread betting, profits are exempt from both stamp duty and capital gains tax in the UK. However with CFD trading, while you are exempt from stamp duty, profits are subject to capital gains tax. Although losses can be offset against profits. Check the tax obligations in your jurisdiction before you start trading.
  • Who can trade – CFD trading is largely available to customers from across the globe. Spread betting, however, is often restricted to citizens from the UK and Ireland. So whichever one you choose, check the product is regulated in your country before you open a trading account.
  • Fees – With CFD trading, fees usually come in the form of a mark-up in spreads and through commission charges. In spread betting, while there are fees included in spreads, there are not usually additional commission charges.
  • Direct market access (DMA) – Spread bets are over-the-counter (OTC) products, whereas CFD trading usually takes place through a DMA platform.
  • Account types – With spread betting, most companies only offer individual accounts. But if you’re CFD trading, you normally have the choice between individual and corporate accounts.
  • Expiries – Spread bets have expiry dates far in the future. In contrast, CFDs, aside from futures, do not expire.
  • Hedging – While hedging is possible with spread betting, due to their tax treatment, CFD trading is more suitable for hedging.

What’s Right For Me?

In general, spread betting is best suited to clients looking for tax-free profits, smaller deal sizes, and minimal commissions. CFD investing will appeal to traders looking for DMA platforms, the tax-deductible benefits of hedging, and the choice of a professional or corporate trading account.

Overall then, the CFD trading vs spread betting debate highlights the fact that while the two instruments have a lot in common, there are subtle differences which will make CFDs a better fit for some and spread bets best for others.

Note that there might be regional differences in the tax treatment of CFDs and Spread Betting in your country of residence. We recommend that you check with your local tax office before engaging in any trading or spread betting activities.

FAQ

Is CFD trading the same as spread betting?

CFD trading is not the same as spread betting. Both are leveraged derivative products, but their tax treatment, for one, is different.

What is the difference between CFD trading and spread betting?

The key difference between CFD trading and spread betting is the tax implications. In the UK, profits from spread bets are exempt from tax while CFD trading profits are subject to capital gains tax. Other differences include the unsuitability of spread betting for hedging and that spread bets are only available in certain countries.

Should I start CFD trading or spread betting?

Which instrument you should choose will depend on your individual needs. If you’re looking for an OTC product that’s exempt from tax, spread betting could be the right option. However, if you’re looking for a DMA instrument with attractive tax deduction capabilities, then CFD trading may be the sensible choice.

Is forex trading spread betting or CFD investing?

You can place spread bets or purchase CFDs on forex. The currency market is suitable for both types of instruments.

Is CFD trading safer than spread betting?

Trading CFDs and spread betting are both risky. The majority of people lose money doing both. So, define your risk tolerance before you start.