Spread betting vs CFD trading

With spread betting, you choose a financial instrument you want to trade, and you speculate on whether the price of the instrument is going to increase in value or decrease. 

This can be done through a variety of financial instruments, such as forex, stocks, indices, and commodities. With spread betting, you can speculate on both rising and falling markets.

You place a bet through a stake, which is a pound per point of movement in the price of the financial instrument.

If your chosen asset moves in your favour, you profit. You calculate your profits by taking the number of points the market moved in your favour multiplied by your original stake amount.

However, the losses are estimated in the same way if it doesn’t move in your favour.

Spread betting, as mentioned above, is a leveraged product, which means both profits and losses are magnified, and sometimes, losses can outdo your initial margin deposit.

The way CFD (contract for difference) trading works is more or less the same as spread betting. It’s also a leveraged product, which means you can trade both rising and falling markets while only having to deposit a small amount of capital called margin. 

You also have the option to trade various financial instruments such as indices, forex, stocks, and commodities.

However, instead of placing a bet per point like in spread betting, you buy or sell a unit of CFDs. It can be seen as taking out a contract with your broker to exchange the difference in value once an open trade has been closed. 

The value of each contract will depend on the market you might be trading.

You calculate the profits or losses that might occur by taking the units of CFDs you might have bought or sold and multiplying it by the amount the market moved with or against you.

We’ll look at an example later to give you a better understanding of how it might work in the markets.

With both CFDs and spread betting, you don’t own the underlying asset you might be trading; you’re only speculating on the price movements in the market.

Now, let’s take a look at some of the key differences when it comes to spread betting and CFDs.

• Spread betting is traded over the counter (OTC) through a broker, while CFDs offer traders direct market access (DMA). There might not be a big difference between these two trading methods, but there is something worth noting: DMA offers quicker trading execution while having lower transaction costs.
• For spread betting, pounds per point of price movements define your stake. You could choose how many pounds per point you might want to trade with. Meanwhile, with CFDs, each contract is defined by lots with a fixed value. So, instead of your stake being pounds per point, it will be fixated on the contract size you might want to trade.
• Spread betting trades have an expiry date by which a result must be determined. These expiry dates come in two forms: daily and quarterly. Traders do have the option to extend their bet if they’ve not reached their desired outcome. While CFDs don’t have any expiry dates, traders might have to pay additional fees if they wish to keep the trade open for extended periods of time.
• Both spread betting and CFDs may experience overnight fees for holding a position. The costs will depend on the size of the position the traders are holding, as well as the current interest rate. Traders wanting to keep positions open overnight might have to look at the costs before continuing because these fees could have a notable impact on the overall performance of the trade.
• In spread betting and CFD trading, the spread is the difference between an asset's ask (buy) and bid (sell) price. Spread betting will have a more extensive spread amount than CFDs. However, that is balanced out with the commissions traders pay in CFDs.
• For both spread betting and CFD trading, a trader doesn’t own the underlying asset they might be trading; therefore, they don’t have to pay stamp duty on the asset. Stamp duty tax is more for traditional trading when traders purchase actual shares from a company, not just speculating on the price movements. If you want to learn more about the difference between spread betting and share dealing, you can click here.
• We saved one of the most prominent differences in spread betting and CFD trading for last, and that is taxation. Spread betting is tax-free but only for people who reside in the UK and Ireland. The profits traders make through spread betting are not subject to paying capital gains tax, whereas profits made from CFD trading are subject to paying capital gains tax. However, being available globally, CFD trading allows traders to offset any losses against profits for tax purposes. It’s worth noting that traders could speak to a tax consultant or accountant to better understand their tax implications.

As promised earlier, we’ll go through an example of spread betting and CFD trading to better understand how it works in the market. 

Let’s take the stock Apple and say a trader is looking to go long in the market. Let’s say the price for Apple is trading at $201.55.

Spread betting example

Spread betting is generally listed in points, so the buy price for Apple is 20155, and the sell price is 20145. A trader decides to go long and bet £1 per point at 20155.

The traders' prediction was correct, and the market moved to a new buy price level of 20255 and a sell price level of 20245. The trader decides to close the position by selling at the new sell price of 20245. In total, the market moved 90 points, which gives the trader a profit of £90.

To calculate this, the trader will take the closing price minus the opening prices multiplied by the stake amount ((20245 – 20155) x £1).

The spread is already covered in the trade's opening and closing price, and no extra commissions need to be paid. If a trader decides to keep the trade open overnight, additional fees will be payable.

CFD trading example

CFDs typically have a smaller spread than spread betting, and the prices usually appear in US dollars. So, the buy price for Apple will be $201.51, and the sell price will be $201.49. The trader decides to go long and buy 10 CFDs at $201.51.

The prediction was correct, and the price rose to a new buy price of $211.51 and a sell price of $211.49. The trader decides to close the position at the new sell price of $211.49, with a difference in price valuation of $9.98. 

To calculate the profits, the trader will multiply the difference in price by the number of CFDs they bought. In this case, $9.98 x 10 CFDs will give them a profit of $99.80.

Some brokers automatically convert the profits into the currency of the country where the trader is based; otherwise, they might have to do it themselves.

As mentioned above, when trading CFDs, traders have to pay a commission after a position has been closed. All US stocks will be subject to a commission charge of 2 cents per share.

To calculate the commission fee for the Apple trade above, a trader would take the 10 CFDs x $0.02 commission charge per share, which will give them a fee of $0.20.

Now, if the commission fee is below $10, they’d pay a commission of $10 because it’s the minimum commission a trader needs to pay. So, with the above-mentioned trade, the commission charge will be $10, giving them a new profit amount of $89.90.

If traders want to keep the trade open overnight, CFDs will also be subject to overnight fees, like spread betting.

Below, you’ll find an in-depth comparison between spread betting and CFD trading to give you a complete overview of these two options.

Before deciding which option to choose, spread betting or CFD trading, there are a few factors that could be taken into consideration. Let’s do a final analysis of both spread betting and CFD trading to conclude everything we covered in the article. 

The first is your geographical location; if you aren’t residing in the UK or Ireland, you won’t be able to trade through spread betting.

CFDs are available in most countries except for the US. Neither spread betting nor CFD trading is available to US residents.

For both spread betting and CFD trading, a trader doesn’t own the underlying asset, which means they don’t have to pay stamp duties.

For spread betting, traders don’t have to pay capital gains tax on profits gained, whereas CFD traders will have to pay capital gains tax. However, CFD traders have the option to offset their losses against their profits for tax purposes.

Both spread betting and CFD trading are traded through the use of margin with leverage. And because it’s a leveraged product, traders could trade rising or falling markets, meaning they could go long if the markets are rising or go short if the markets are falling.

Traders can trade on a variety of financial instruments, such as forex, indices, shares, commodities, and more. For most of these financial instruments, traders have access to the market 24/5, except for the stock market, which has its own operating hours.

Deciding which one of these options to use in trading will depend on a trader’s opinion, trading goals, trading strategies, and risk management plan.