14 May 2024 - 13min Read

global markets illustrative icon
Spread betting

Spread betting vs CFD trading

Spread betting and CFD trading are both forms of derivative trading. It allows traders to gain full exposure in the financial market through leverage. You don’t own the underlying asset in spread betting and CFD trading. You’re just speculating on the price movements.

Spread betting and CFDs have some similarities, such as trading with leverage on both rising and falling markets and accessing various financial instruments.

There are also some key differences to consider, and throughout this article, we'll be looking at those and what's unique about spread betting and CFD trading.

TABLE OF CONTENTS

Key takeaways

  • Spread betting and CFD trading are derivative products that allow traders to participate in the market using margin.
  • Both methods allow traders the opportunity to participate in both rising and falling markets; traders can go long if the market is rising and go short if the market 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 both aren’t allowed in the US.
  • Spread bettings trading size is calculated as pounds per point.
  • CFD trading size is calculated by the number of contracts.

Marc Aucamp

Content Writer

Liked this article? Share now on socials

How does spread betting work?

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.

Going long vs going short in spread betting

How does CFD trading work?

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.

going long(buy) vs going short (sell) on cfd trading

Key differences between spread betting vs CFDs?

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 buy and 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.

Spread betting vs CFD trading example

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.

CFDs vs spreads betting: in-depth comparison

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

Feature

Spread betting

CFDs

What are the tax implications?

Profits are not subject to capital gains tax, and traders don’t pay stamp duty on the underlying asset.

Traders don’t pay stamp duty on the underlying market. However, CFD traders will be subject to capital gains tax.

Are there any charges or fees?

No commissions are charged, but the spread will be higher than CFDs to substitute commissions. Traders wanting to keep a trade open overnight will be liable to an overnight fee.

The spread is much lower in CFDs than in spread betting. However, commissions will be payable after a position is closed. CFD traders wanting to keep a position open overnight will be liable to an overnight fee.

To whom is it available?

Spread betting is only available to people residing in the UK or Ireland.

CFDs are available to the majority of people around the world.

Is it possible to trade long and short?

Yes, with spread betting, a trader can trade rising markets as well as falling markets.

Yes, with CFDs, a trader can trade rising markets as well as falling markets.

How to calculate profits and losses?

To determine the profits or losses, a trader must take the closing price level and deduct it from the opening price level, then multiply that amount by the original stake amount.

To calculate the profits or losses, a trader must take the closing price and deduct it from the opening price; the difference between the two prices then gets multiplied by the number of CFDs.

What kind of trading style is it suitable for?

Scalping, day trading, or swing trading are more suitable for spread betting.

Scalping, day trading, or swing trading are more suitable for CFD trading.

What are the trading hours?

Trading indices and forex traders can trade 24/5. With stock trading, regular stock exchange hours are available.

Trading indices and forex traders can trade 24/5. With stock trading, regular stock exchange hours are available.

What markets can be traded?

Traders can participate in a wide variety of markets, such as forex, commodities, indices, stocks, shares, bonds, ETFs, and more.

Traders can participate in a wide variety of markets, such as forex, commodities, indices, stocks, shares, bonds, ETFs, and more.

What are the trade sizes?

The trade size is calculated as pounds per point

The trade size is calculated by the number of contracts (CFDs)

Can you open a corporate account?

Yes

Yes

The markets are moving.

Start trading now.

Get startedarrow-icon
arrow-icon

Spread betting or CFD trading: which is right for me?

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 leveraged products, which means they are traded through the use of margin. 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.


People also asked

/

Yes, leverage works the same for both spread betting and CFDs. However, the leverage ratio will depend on various factors, such as financial instruments, geographical location, and the broker a trader uses. The amount of margin will also differ depending on the financial instrument a trader wishes to trade.
With leverage, a trader only deposits a small amount of capital, known as a margin, to open a position and gain full market exposure. As profits and losses are both magnified with leverage, the risk is evident, meaning traders might need a good risk management strategy.

/

No, UK and Ireland residents are the only ones who will be able to spread bet. With that said, CFDs are available in most countries around the world.

/

No, spread betting and CFDs are derivative products, which means traders can only trade them through the use of leverage with margin. A trader can adjust the leverage they want to use, meaning they don't have to trade with the full leverage available to them. They could use lower leverages, such as 5:1 instead of 30:1.

/

Spread betting and CFD trading have some similarities, such as both being leverage products. However, some key differences exist, such as the tax treatments offered for both spread betting and CFDs and the location availability. Spread betting is only available to residents of the UK and Ireland, whereas CFDs are available to most countries around the world.

/

With spread betting and CFDs, traders don’t own the underlying asset, which means they don’t have to pay stamp duty tax. As mentioned, only residents of the UK and Ireland can participate in spread betting and don't pay any capital gains tax on their profits. Whereas CFD traders have to pay capital gains tax on their profits earned, but they could offset their losses against their profits for tax purposes. Traders could consult a tax consultant or accountant to understand the tax implications better.

Suggested articles

See allarrow-icon
arrow-icon

Gain the edge

Sign up and unlock early
access to exclusive trading
insights and tips.

You're signed up

Best decision you've made all week!

Something isn't right

Let's try that again

I confirm I am 18 years old or above.

By signing up to hear from us, you agree to our terms and privacy policy.

Please keep me updated on Trade Nation’s sponsorships, news, events and offers.

The markets are moving.

Start trading now.

Get startedarrow-icon
arrow-icon

Trade on our
award-winning
platform


en-gb

Payment methods

Visa card payment method
Mastercard payment method
Nuapay payment method
Skrill payment method
Neteller payment method
Apple pay payment method

Download mobile apps

Regulatory bodies

    UK - FCA

    Australia - ASIC

    Seychelles - FSA

    Bahamas - SCB

    South Africa - FSCA

Customer support

Sponsors of your favourite teams

The legal stuff

© 2019-2024 Trade Nation. All Rights Reserved