What is the difference between spread betting and CFD trading?

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 in-fact 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.

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 (with DMA brokers) 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 DMA 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.

We’re here with Ryan O’Dougherty from CMC Markets. We’re going to have a quick chat about the difference between spread betting and CFD training – that’s Contract for Difference training; two forms of margin trading. So Ryan, welcome. Thank you for joining us again.

Thanks for having me.

Spread betting and CFD trading; two products that CMC Markets offers. What’s the difference?

It’s a good question because, you know, when I first came to the UK, this concept of spread betting was quite novel to me, because spread betting is only available here in the UK and Ireland. And it’s very much set up as a tax-efficient way of trading the financial markets. So because you’re placing a number of pounds per point bet on a particular trade, there’s no Capital Gains Tax associated with spread betting, there’s no stamp duty associated with trading spread betting. And so that’s one of the major benefits of a spread bet account. Globally though, CFDs is the product. So outside of the UK and Ireland, you know, CFDs is the product. They both offer margin trading, they both profit from rising and falling markets. But with spread betting, your trade size is that pound per point, where with CFDs, you’re trading in a number of units. So especially if you’ve been coming across from physical share trading or FX trading elsewhere, you know, CFD trading feels a little bit more natural because you’re trading in a number of units, where spread betting, you’ve got to grab the concept of this pounds per point. But after a while actually, I find that spread betting’s an easier product to use.

I’ll be honest with you, I find spread betting a little bit easier for risk management purposes, rather than CFDs. I find, you know, oh, I know that that’s £10 per point on the FTSE and I know that if I want to lose £100 or make £100, that’s…

I totally agree. I think for new traders, they’ll come on and they may not get the concept, but if they just spend a little bit of time learning the spread betting platform and how it works, I think over time, they’ll find that a lot easier to deal with. As you rightly said, you know, if the market moves 100 points, I’ve got £1 per point, there’s £100. It’s quite a simple concept.

The other areas that CFDs is traded in the currency of the particular product. So unlike spread betting, where everything is pounds per point – you don’t have to worry about currency conversions – with CFDs, when you’re trading a US market or a European market, it’s traded in euros or US dollars, and so once you close that position, it’s got to then convert back into your account currency.

So those are probably the two biggest differences.

And for Irish customers, can you trade spread betting in euros per points and denominate your account?

Yes, you can. Yeah, yeah, you denominate in the euros per point. So they’re the only two. So you’ve got the euros per point for Ireland and then pounds per point for the UK.

Sure. And there’s really no point in having any other currencies because nobody else can do it because you don’t get the tax benefits.

Exactly right.

But whereas with CFD trading, your P&L is in the underlying asset currency, so if you’re trading a dollar to nominated index for example, your P&L’s in dollars. But if you’ve got a sterling account with CMC, what happens to those dollars afterwards?

Yeah, so basically, what we do on the platform is that your actual P&L is always displayed in your account currency. So even though your profit and loss is being calculated based on the currency of that particular product, we’ll automatically be converting it into pounds, so we display that on the platform. So once you close out the trade, it’ll always be in pounds, so your account has always only just got pounds in it. But you can get accounts where you have multi-denominated currencies.

So for example, in arbitrage trading, for example, if you want to be market neutral overall but you think the FTSE’s going to go up but the Dow’s going to go down, so you buy the FTSE, where your P&L will be in sterling, and you sell the Dow, where your P&L will be in dollars. You’ve obviously got a currency exposure. So obviously, with spread betting, it’s in pounds so it’s not really an issue, but with CFD trading, can you have different subaccounts in different currencies?

There are accounts that allow you to do that. So you can actually have a subaccount, for example, and just have one in US dollars and one in pounds. What we find is that a lot of clients prefer just having it in the one, pounds, and it just automatically does it for you because it’s a lot simpler for them. But there are opportunities to have that multi-denominated account.

And in terms of costs involved in the two types of trading, just talk us through the way commissions work in spread betting and CFDs, and the way financing the leverage positions works.

Yeah. So financing is very similar between spread bet and CFD. So if you hold the position overnight, past 10 pm, then you are charged a holding cost. Because you are trading on margin, you’re effectively borrowing the funds to take out the position. So if you hold it past that 10 o’clock, you’ll get charged a holding cost, both on CFD and spread bet.

And is that for long and short positions, because obviously, the financing cost is Libor.

Plus or minus…

With interest rates so low at the moment, do you actually receive interest on short positions or is that…?

It all depends on the product you’re trading, so FX pairs, for example, or commodities potentially, you might have a differential between the two. So if the UK economy’s offering an interest rate of 0.5 or 0.75 per cent and then you’re trading in a currency that’s got four or five per cent, there may be an opportunity where, you know, you might receive funds rather than being charged. But generally, there’s a holding cost.

And how do commissions work?

So commissions is a really good one to bring up because with spread betting, you don’t get charged commission, but effectively, what happens is that that commission cost is built in to the spread. So when you’re trading equities, you’ll have a slightly wider spread than what you would see, let’s say in the underlying market, to factor in the commission cost. Where with CFDs, it’s purely based as a commission cost when you go in and a commission cost when you go out. There are a lot of companies that actually go out there and talk about this as zero commission. Be careful because there is that element of making sure…

Nothing’s free.

Nothing’s free, exactly. It’s like going and getting your money changed at an FX bureau when you’re travelling. They say no commission but then the spread is massive. So the same thing should apply to FX trading and equity trading as well, is really be wary of what the spread is, because either if it’s zero commission, it hasn’t been built in to the spread etc.

And actually, that’s always been one of the attractions to me of spread betting versus, well you know, DMA, CFD trading when you get charged the commission on top of it. With spread betting, it was always a nice, clean price. Pop your entry price into a spreadsheet and then that’s it.

Yeah, you don’t have to worry about that commission side of thing going on at the same time. Yeah, so the other great thing about spread betting as well is that you can trade it in smaller amounts. So traditionally, on CFD training, they’ll be a minimum commission cost placed on a trade, so that might be £9 or £10 on a particular trade, whereas spread betting, because it’s built in to the spread, you could trade a minimum or fractional amount and get exposure without having that minimum commission cost.

And obviously, with both spread betting and CFDs, if you’re trading equities, you’re trading with yourself, so you’re trading with CMC Markets; you don’t own the underlying.

Yeah, that’s right. You don’t own the underlying. So yeah, both CFD and spread betting are the same in that method. So you don’t get any of the voting rights and things that go with holding an equity as you would with the physical share trading. Dividends will still affect the price. So your price is adjusted basically for that dividend.

So if you’re long, do you receive a credit?

So the price of the value, so your position is adjusted, based on whether or not the dividend, and what value that dividend is, so you’re losing out by not owning the underlying. The price is adjusted to factor that in for you.

You can’t just go and short the stock ahead of a dividend...

No, yeah, because of course, the price will generally fall by the value of the dividend in some way, shape or form; it will be affected.

And generally, at CMC Markets, do you see a big difference in the asset classes that are traded via spread betting or CFD? Do you find that a lot of CFD traders trade foreign exchange where spread betters trade equities? Is there a big difference between them?

Not a huge difference. I mean the two big markets in this is an FX… you know, make up a huge portion of trading, both in CFD and the spread bet market. You might bet more traders on the CFD with the equities but again, it’s a very similar mind-set in regards to both of the accounts because they do operate pretty much the same in many respects, so the types of traders that get in there, some people might just not like the concept of betting or spread betting. So they’ll go with a CFD account, rather than… but majority of the accounts set up in the UK are spread betting accounts. And then, you know, rest of the world obviously CFD.

Right Ryan, thank you very much.

No problem.

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ALL INVESTING INVOLVES RISK. Investing, Derivatives, Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
ESMA & FCA Risk Warning – “CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 68-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk”

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