CFD Trading Vs Spread Betting

CFD trading and spread betting are popular in the UK. Both offer margin trading and exposure to a range of financial markets, from forex to stocks. However, when taking CFD trading vs spread betting, there are also some key differences, particularly around their tax treatment. Here we look at the benefits of CFDs vs spread betting to help you decide which is best placed to meet your investment objectives.

What Is CFD Trading?

A contract for difference (CFD) is a derivative, meaning you can speculate on price without owning the underlying asset. CFDs are available in all major financial markets, including forex, stock indices, single shares, commodities, plus cryptocurrencies such as Bitcoin.

When CFD trading, an investor buys and sells a specific number of units / CFDs. And because leveraged trading is available at most online brokers in the UK, you can bolster your position size in exchange for a small capital outlay.

See our list of top CFD brokers.

What Is Spread Betting?

A spread bet is a straightforward speculation as to whether the price of an asset will increase or decrease. The profit is your position size multiplied by the number of points or pips an asset has moved. Any losses are calculated in the same way.

When spread betting, losses can exceed deposits so caution is needed. As with CFDs, spread betting in the UK is available across most markets, including forex and stocks.

See our list of top spread betting brokers.

CFD Trading Vs Spread Betting

When debating CFD trading vs spread betting, there are several differences to be aware of.

Taxes

The key difference between spread betting and CFDs is their tax treatment in the UK:

  • CFD trading is subject to capital gains tax (CGT) once a certain deal size has been met while profits can be offset against losses
  • Spread betting profits are free from capital gains tax

Note, both CFDs and spread bets are exempt from stamp duty as neither involves owning the underlying asset traded.

Find out more about your trading tax obligations in the UK.

Fees

When looking at CFD trading vs spread betting, it’s also worth understanding where brokers make their profit. With CFDs, brokers typically make money from the spread and may also charge a commission. With spread betting, brokers usually include their costs in the spread which could make spread bets more appealing if you’re investing in fewer stocks.

Expiry

Spread bets typically have a fixed expiry point, ranging from the end of the day to several years in the future. CFDs on the other hand, do not usually have a fixed end date. Instead, traders can close their position in line with their strategy.

Direct Market Access

When CFD trading vs spread betting, investors usually get direct access to the financial markets and forex order books, for example. Spread betting does not provide the same level of market access.

Trade Size

With spread betting, investors choose the size of the bet regardless of the price of the underlying asset. For example, you could place a £20 spread bet on a £1,000 share. With CFD trading vs spread betting, the contract size is usually linked to the asset price. For example, a £20 per point contract on a Diageo contract will be cheaper than a £20 per point contract on the FTSE 100.

Pros Of CFD Trading

Benefits of CFD trading include:

  • Direct market access to forex and stock markets
  • Leverage up to 1:30 at UK regulated brokers
  • Losses can be offset against profits for taxes
  • Buy and sell on rising and falling assets
  • Straightforward derivative product
  • No stamp duty

Pros Of Spread Betting

Reasons to start spread betting include:

  • Exempt from capital gains tax
  • Margin investing available
  • Easy to use derivative
  • 24 hour markets
  • No stamp duty

Should I Start CFD Trading Or Spread Betting?

The choice of CFD trading vs spread betting will ultimately come down to personal preference. For those wanting direct market access and an efficient method of hedging alongside the ability to offset losses against profits, then CFDs might be the sensible option. For those seeking a straightforward product, free from taxes and offering complete control over deal size, then spread betting could be suitable. You may even want to open accounts for both – CMC Markets and IG offers spread betting and CFDs.