Spread betting and CFD trading are popular leveraged products, which provide an opportunity to trade on rising or falling markets. Although both of them share many benefits, there are some key advantages to each. Spread betting or CFD trading: read more to learn the difference.
Spread betting vs CFDs: major difference
The major difference between spread betting and CFD trading is how they are taxed. While profits from CFD trading are subject to taxation, spread betting is a tax-free product exempt from capital gains tax (CGT).
Spread betting is available only in the United Kingdom and Ireland, while contracts for difference can be traded by clients from around the world, where permitted.
Spread betting or CFD trading? Both forms of derivatives trading enable you to go short or long, though there are technical differences in how they work:
When you open a spread bet you make a decision as to whether you believe the price of a financial instrument (a stock, commodity, index, currency pair or cryptocurrency) is likely to increase or fall, and place your bet accordingly. The sum of money you want to bet per point of an asset’s price movement is considered your stake.
It means if the asset’s price goes in your favour, you can calculate the profit from your trade by multiplying the size of your initial stake by the number of points the asset’s price moved.
All spread bets have a fixed expiry date.
A contract for difference (CFD) is a type of contract between a trader and a broker in order to try and profit from the price difference between opening and closing the trade.
When trading contracts for difference, you buy or sell a certain number of CFD units on an underlying instrument, similar to trading shares or other physical assets. The profit or loss on the trade is the difference from the level at which the contract is opened to when it is closed.
With both contracts for difference and spread bets, you can trade on margin, meaning a smaller initial deposit can open a higher value position.
Contracts for difference do not expire.
Spread betting vs CFD trading: what is best for you?
Spread bet or CFD, both types of leveraged trading are used by traders and investors to trade falling or rising markets. You can find more detailed information about CFD trading in the dedicated section. For now let’s focus on the advantages of spread betting:
The list of key spread betting benefits includes:
When you open a spread bet you deposit a certain percentage of the total trade size, which is known as initial margin. For example, if you want to place a bet equivalent to £1000 of GOOGL shares and the margin is 1:10, you would have to deposit just £100 to open a trade. Leverage can significantly increase your profits, but also increases risks. Don’t forget about risk management.
Long and short positions
With spread betting you can benefit from both upward and downward price movements of various assets. You don’t buy the asset itself, you just make a bet on its price direction. If you believe the market will rise, you open a long position; if you feel the market will fall, you open a short position.
When you trade traditional financial markets such as shares, or CFDs, you could be liable to capital gains tax (CGT) on profits you make. Spread-betting is exempt from CGT, so you can keep all the profits - although individual tax circumstances can be different.
For more information, visit our spread betting benefits page.
Spread betting vs CFDs: differences in details
What are the main differences between spread betting and CFDs?
|Spread betting and CFD difference||Spread betting||CFD|
|Tax-efficient investments||Unlike in traditional stock market trading, spread betting profits are not subject to capital gains tax (CGT) and stamp duty.||Profits from CFDs are subject to capital gains tax. They are however exempt from stamp duty, because when trading CFDs you don’t own the underlying asset itself.|
|Availability across the world||Spread betting is available only to traders from the United Kingdom and Ireland.||CFD trading is available for traders and investors globally.|
|Flexibility: long and short positions||Spread betting enables traders to benefit from rising and falling markets. You can open a long position, betting on the price to go up, or you can take a short position, betting the price will fall.||The opportunity to profit from either direction for an asset’s price is one of the key advantages of CFD trading. You can go long, predicting the price will rise, and go short, when the price is expected to go down.|
|Applied commissions||Spread betting with Capital.com trading platform does not require paying any additional commission besides the spread.||Trading CFDs with Capital.com trading platform you do not pay any hidden fees. No fees for deposits and withdrawals or opening/closing trades.|
|Spreads and execution costs||The spread is always incorporated into our quoted rate and is never an additional charge payable by traders.||With CFDs, we are compensated based on spread charges, which are competitive across the market.|
|Profit and loss calculation||With spread bets you can estimate your potential profit and loss as follows: calculate the difference between the enter and exit price and then multiply the difference by your stake.||With contracts for difference, you can estimate your potential profit or loss as follows: calculate the difference between the enter and exit price and multiply it by the number of CFD units.|
|Leveraged trading||Financial spread betting is a leveraged form of trading. It means you only deposit a certain percentage of the total position value to open a trade. The rest is covered by your broker.||Contract for difference is a leveraged form of trading. It means you only deposit a certain percentage of the total position value to open a trade. The rest is covered by your broker.|
*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.