Considering the similarities first: both are methods of speculating on financial markets, and both are available on the same wide range of products. They are traded on margin, which means you only need to put up a small percentage of the trade's value to control all of it. This means you're using leverage, and the trade’s full profit or loss is calculated on the total position size, not the margin amount, so losses could substantially outweigh your margin. While trading/betting with leverage magnifies your profits, your potential losses are similarly increased. Consequently, risk management is extremely important when trading both CFDs and spread bets. Another aspect of trading on margin is that you can go short of a market (in other words, look to profit should it fall in price) just as easily as going long, where you speculate on it rising in price. Perhaps most importantly, you don't pay stamp duty with either spread bets or CFDs. This is because you don’t take ownership of the underlying assets when you trade, whereas you do when you buy physical shares with a broker.
However, there are some important differences between the two trading methods. For a start, with CFDs the minimum trade sizes are typically larger than those for spread bets. With CFDs you trade in ‘contracts’, the size of which are predetermined by your broker. With spread bets, you trade in pounds, or pence, per point which means you have much more control over the size of your trade, as long as it is equal or over the broker’s ‘minimum bet requirement’ which can be as little as £0.10 per point. Following on from this, with spread betting, you choose the currency in which you trade when you set up your account. This means that all your bets, deposits, profits and losses are in the underlying currency of your choice. With CFDs, the currency depends on the market you are trading, so you should expect regular FX exchanges to convert profits and losses into your account’s base currency. There is also a significant difference in the way CFDs and spread bets are treated for tax purposes. In the UK, spread bets are free from capital gains tax (CGT) whereas CFDs are not. This means that under usual conditions* profits from spread bets fall outside the purview of HM Revenue & Customs. This may not be the case with profits from CFDs. However, it is worth noting that profits from CFDs can be offset against losses for tax purposes.
*We do not offer tax advice. Please seek out professional guidance to check your specific situation.
*Spread Betting is exempt from UK stamp duty and UK Capital Gains Tax. But tax treatment depends on individual circumstances. Please seek independent advice if necessary.
