What is the difference between spread betting and CFD trading?

It really annoys me that Plus 500 is always described as a spread betting broker. They are a CFD broker, they don’t offer spread betting.

It’s sloppy reporting. But I mention it because Plus 500 has had yet another profit warning. Not that shocking really, especially as they were just outed as the most shorted stock by hedge funds on the market.  If you read that article, the Daily Mail incorrectly calls them a spread betting company.

Note  – find out what hedge funds are shorting here…

Plus 500 were mentioned in the City Spy section of the Evening Standard as a spread betting company. So I emailed City Spy to tell him (or her) so, and have yet to get a rely. Then in The Times business section and even an opinion peice this morning, again, a proper newspaper they were described as a spread betting company.

Whilst spread betting and CFD trading may seem similar, in that both allow you to place leveraged bets on the direction of a stock or commodity without actually owning it, they are in fact quite different.

Here are the main differences between spread betting and CFDs…

With spread betting, you bet an amount per point movement as a bet.  With CFDs, as a contract for difference, you enter into an agreement where the outcome is based on the difference between the opening and closing prices of a certain amount of shares.

The difference in the regulation of spread betting and contracts for difference

Both are regulated by the FCA in the UK. Even though spread betting is technically gambling because it is primarily used for financial speculation and losses can exceed stakes and even account balances in some cases the FCA regulated financial spread betting. There are many benefits of spread betting being regulated by the FCA, including increased due diligence, compliance, and capital requirements, as well as FSCS balance protection.

Spread betting is unique to the UK as the main benefit is the tax breaks (read on for more info), but CFD trading is offered Globally. With the exception of the Americans, they don’t allow CFD trading, or infact US citizens to have accounts with non-British brokers offering CFDs. An FCA regulated CFD broker isn’t allowed to open accounts for our friends across the pond.

CFD Trading Outside the UK

With asset classes such as FX, indices and commodities (as well as equities) those outside the UK still want leveraged access to the markets.  Where spread betting is not available, clients from those jurisdictions use CFDs instead.  Check our list of spread betting brokers for more information.

If you are thinking of using a non-regulated CFD broker, don’t. The due diligence is not as stringent and there is no client protection on deposits if a broker goes into liquidation. Be careful, even when a broker appears on the FCA register because offshore brokers can use local regulation (cyprus for example) to passport on to the register, which does not offer you the same protection as a broker being authorised and regulated by the FCA.

The difference in risk associated with spread betting and CFDs

The risks of spread betting and CFDs are generally the same. You are trading on margin, so you can lose all or significantly more than your initial deposit if you are a professional client.

Also, if you are short and betting/speculation on a company going down, you have potentially unlimited losses.

Another risk is in the nature of the products themselves, in that they encourage short term highly speculative trading. We covered by moving from phone trading to online trading has reduced performance when we interviewed Thomas Peterffy, founder and CEO of Interactive Brokers.

Spread betting and CFD trading have changed dramatically since they were set up. The original use of CFDs was for funds to hedge exposure against a long-only portfolio, or for a hedge fund to acquire large stakes in companies without having to disclose it. But, as with all financial products, technology has made them more accessible to the mass market.

This is something which the regulators are trying hard to prevent. As in actual fact in most cases, CFDs and spread betting are wholly unsuitable for most inexperienced investors. Especially with the likes of Instagram forex scams being so rampant.

Stamp Duty on Spread Bets and Contracts for Difference

One of the main similarities are that there is no stamp duty payable on equity trades.  This is a particularity important point as stamp duty rates on stock trades is currently 0.5%.  So if you buy £100k of stock it is a whopping £500.

Overnight financing difference for spread betting and CFDs

Both spread betting and CFD trading are also subject to overnight financing charges.  This means that if you hold a position overnight (and because the broker is essentially but not actually) lending you money to do this on margin your CFD or spread betting broker will charge you a percentage over/under libor for the privilege.

Types of client for CFDs and Spread Betting

Spread betting customers are usually private individuals based in the UK (the only place that gets the tax benefit) with accounts sizes from £100 to £100k.  In theory, there is no limit to how big your account can be, but when customers are at the point of trading with more than £100k they generally need things like direct market access which is more readily available with CFDs.

CFDs are a more appropriate trading tool for professional investors and hedge funds.  They offer anonymity for large positions and still provide access directly (via DMA) onto the order book for better prices and larger orders.

Commissions for Spread Betting vs CFD Trading

Spread betting is attractive to private investors as there is no additional commission added to the trades so it appears as though they are trading for free.  Although the price is slightly wider (the spread) so there is a cost to trading, it’s just easier to ignore.

With CFDs, commission is charged in the traditional way.  As a percentage of the trade value on the way in and way out.  This added cost (although it is usually the same as the spread added to spread betting) may sometimes put small private trades off

Spread Betting is free of capital gains tax*

There is always a * with this as tax law is subject to change.  When a profit is made with spread betting it is not subject to capital gains tax as it is structured as a get, rather than an investment.  This is not the case with CFDs and tax must be paid on profits is applicable.

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