Spread betting vs CFD trading

• Spread betting and CFD trading are derivative products that allow traders to participate in the market using margin.
• Both methods allow traders to participate in rising and falling markets; traders can go long if the market is rising and go short if it is falling.
• Spread betting and CFDs differ in stake calculations, tax implications, costs, and spreads.
• Residents of the UK and Ireland don’t pay capital gains tax on profits gained with spread betting, while CFDs offer traders the ability to offset their losses against their profits for tax purposes.
• Spread betting is only allowed in the UK and Ireland; CFDs are available to most countries worldwide, but neither is allowed in the US.
• Spread betting trading size is calculated as pounds per point.
• CFD trading size is calculated by the number of contracts.

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 various 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 financial instrument's price.

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. Your losses will be calculated in the same way if the trade were to move against you.

Lastly, as mentioned above, spread betting is traded on margin with leverage, 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 in.

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 something worth noting is that 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 fixed on the contract size you might want to trade.
• Both spread betting and CFDs have no expiry; however, it might be essential to remember that holding positions overnight typically incurs swap or financing charges, which can impact long-term profitability.
• Both spread betting and CFDs may experience overnight fees for holding a position for longer than a day. 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 bid-ask spread is the difference between an asset’s ask (buy) and bid (sell) price. Spread betting will sometimes have a more extensive spread amount than CFDs. However, that is balanced out with the commissions traders pay in CFDs. It might be worth noting that the commission for CFDs is subject to each broker. At Trade Nation, we don't charge commission for CFD trades, and we offer low-cost fixed spreads across both CFD trading and spread betting.
• 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/investing when traders/investors purchase actual shares from a company, not just speculating on the price movements. However, there are various other differences between spread betting and share dealing.
• 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 when trading CFDs or spread betting.

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 let’s say 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 price multiplied by the stake amount ((20245 – 20155) x £1).

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

CFD trading example

CFDs in general have a smaller spread than spread betting, and the prices usually appear in US dollars. So, let’s again assume the buy price for Apple is $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 multiplies the difference in price by the number of CFDs they bought. In this case, $9.98 x 10 CFDs gives 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, traders might have to pay a commission after a position has been closed when trading CFDs.

Generally, 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, giving 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.

CFDs, like spread betting, are subject to overnight fees if traders want to keep the trade open overnight.

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

Like any financial instrument, Contracts for Difference (CFDs) come with both benefits and drawbacks.

Advantages of CFD Trading

• Leverage allows traders to gain full market exposure through a small deposit called a margin. Potential profits and losses can both be magnified.
• Trade both rising and falling markets by taking long or short positions.
• Access a broad range of global markets across forex, indices, commodities, and shares from a single platform.

Disadvantages of CFD Trading

• Leverage can be seen as a double-edged sword, because potential profits and losses can both be magnified.
• CFDs require a solid understanding of trading mechanics and risk management principles.
• Markets can move quickly, and CFD prices can fluctuate just as fast - leading to potential losses. So, having a solid risk management strategy might be essential.

Spread betting might offer a flexible way to trade on financial markets, but it’s not without risk.

Advantages of spread betting

• Similar to CFDs, you can trade larger positions with a relatively small deposit.
• Trade on price movements in forex, indices, shares, and commodities.
• Opening and closing trades quickly could make it ideal for fast-moving markets.

Disadvantages of spread betting

• Leverage can increase losses as much as potential profits, especially in volatile conditions.
• Understanding how spread betting works takes time and practical experience.
• You’re speculating on price movements without owning the actual asset, so dividends or shareholder rights aren’t available.
• Markets can move against your position rapidly, especially during highly volatile market conditions, leading to sharp losses.

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.