On the surface, CFD trading and spread betting may seem similar, but there are some quite significant differences. In this guide, we will explain in greater detail the differences between CFD trading vs spread betting and why the two products that seem quite similar are actually very different.
Key differences between spread betting and CFD trading
The key difference between spread betting vs CFDs is that spread betting is unique to the UK as trades are structured as bets and therefore free of capital gains tax.
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.
In this interview, we discuss with Ryan O’Doherty from CMC Markets the main differences between financial spread betting vs CFDs (contracts for difference trading).
Also, in this article, I’ll go through the main differences between spread betting and CFDs in each section below, including:
- Tax benefits
- Global appeal of CFDs
- Leverage and margin
- Overnight financing
- Types of client
- Commissions and spreads
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 vs cfds is unique to the UK as the main benefit is the tax breaks (read on for more info), but CFD trading is offered Globally. Except 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.
UK tax benefits
The point of spread betting vs CFDs is that you place your trades as bets and as such you do not have to pay capital gains tax on your profits. Tax law is subject to change but as the only tax benefits benefit UK traders, spread betting is unique to the UK as it is regulated by the FCA.
Capital gains tax
There is always a * with this as tax law is subject to change. When a profit is made with spread betting vs CFDs 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.
One of the main similarities are that there is no stamp duty payable on equity trades. This is a particularly 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.
CFDs are a global product
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 vs spread betting 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.
You can read more on CFD scams here
Leverage & margin
The risks of spread betting vs 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.
- Related guide: Compare professional trading accounts.
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.
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
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 vs spread betting 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, spreads & fees
Spread betting vs CFD trading 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 vs CFDs FAQ:
Spread betting is more efficient for UK traders, traders outside the UK use CFDs to speculate on the markets.
For professional traders, CFDs are cheaper as you can trade via DMA. Spread betting and CFD trading cost the same for retail traders.
Both are regulated by the FCA, not the gambling commission however, spread betting is technically gambling, CFDs are an OTC trading product.
Both spread betting and CFD trading are equally hard to make money – only around 20% of traders make money.
IG, Spreadex, CMC Markets and City Index offer spread betting and CFDs. In fact most spread betting companies also offer CFDs, but not all CFD brokers offer spread betting. You can use our comparison tables below to compare the different types of CFD and spread betting broker: