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The main difference between CFDs and spread betting is really the client base and geographical location. The products are basically the same. You bet or trade on the price movement of an asset without actually owning it.
With spread betting you bet an amount per point movement. 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 the trade.
Stamp Duty on Spread Bets and Contracts for Difference
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 trades 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 direct 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.
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.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.