Both spread betting and CFD trading are margined products and forms of derivative trading. This means that you do not take ownership of the underlying asset, but you open a position that’s based on whether you expect the instrument’s value to rise or fall. They both can provide similar economic benefits to investments in indices, commodities, shares, and currencies. Both spread betting and CFD trading offers leveraged trading on a range of markets, including shares, indices, forex, and commodities.
What is spread betting?
When you place a spread bet, you choose whether the price of a product or financial instrument (like stock index, share, commodity, or currency pair) is likely to go up or go down. Then, you decide on how much to bet. The amount that you want to bet per point of movement in price is your stake.
If the price of the product moves in your favor, your profit is calculated by multiplying your original stake size by the number of points that the instrument has moved. If the price goes against you, your loss is calculated in the same way.
What is CFD trading?
When trading CFDs, you are buying or selling a number of units or a specific amount of CFDs in an instrument. It is similar to the way that you would with when you trade physical instruments. However, with CFD trading, you don’t own the underlying asset, and you can trade on margin. You can take a position with a notional value of a lot more than the amount of money that you have to deposit.
Even though spread beting and CFD trading share many of the same benefits, there are main differences to each of them.
Spread betting and CFD trading differences
Tax-efficient Trading
With spread betting, unlike with share trading, the profits that are made are exempt from stamp duty and capital gains tax in the UK. Tax-efficient trading with CFD trading means that there is no stamp duty that you need to pay since you don’t own the underlying asset. You will, however, be subject to capital gains tax.
Who can spread bet and trade CFDs?
Spread betting is only available to customers who live in the UK or Ireland. With CFDs, it is available to customers worldwide.
Short selling
When spread betting, you can go both long and short. You can take a long position when the market prices rise, or you can open a short position when the prices drop. When CFDs trading, you can go long and short. You can take a long position when the prices increase, and you can open a position when the prices drop.
Commision charge
With spread betting, companies do not charge commissions or fees. When contracts are closed, and there are either profits or losses, the trader either owed money or owes money to the trading platform. Besides for margins, CFD trading requires that the investor pays commission chargers and transaction fees to the provider. Both spread betting and CFDs are subject to dividend payouts all assuming a long position contract. Even though there isn’t a direct ownership of the asset, a provider and spread betting company will pay the dividends if the underlying asset does as well.
Spreads and holding costs
An additional spread can be built into the prices that are displayed on some platforms. The prices are applicable upon the execution of any order. Holding costs could apply to spread bets. With CFDs, holding costs could apply.
Calculating profit and loss
If you are looking to calculate your profits and losses with spreading beating, you need to find the difference between the price at which you enter and the price that you exit. You then multiply the difference by your stake. When you are CFDs trading, you determine the profit and loss by the difference between the price that you enter and the price that you exit at and then it is multiplied by the number of CFD units.
Margined trading
Spread betting is a financial leveraged product. This means that you just need to deposit a small percentage of the total value of the spread to open a position. CFDs are a leveraged product, so you just need to deposit a small percentage of the total value of the trade to open a position.
Trading mechanics
With spread betting, traders can trade a specific amount per point of the market movement. When CFDs trading, traders can trade on lot sizes on commodities and forex, and a certain number of shares.
To conclude, while there may appear to be similar fundamentals to spread betting and CFD trading on the surface, the differences may not be apparent to new investors. While spread betting does not have any commission fees, unlike CFDs, the losses with CFD trading are tax-deductible. In addition, the trades can get done through direct market access. All spread bets have a fixed expiry date, and CFDs do not expire, besides for the futures and options.
Risk Warning: Users should be aware that all investment markets carry inherent risks, and past performance does not assure future results. Trading of any kind is a high-risk activity, and you could lose more than you initially deposited. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73-89% of retail investor accounts lose money when trading CFDs. Please be sure you thoroughly understand the risks involved and do not invest money you cannot afford to lose. Your capital is at risk. Advertiser Disclosure: TopBrokers.Trade is an independent professional comparison site funded by referral fees. The compensation TopBrokers.Trade receives is derived from the companies and advertisements featured on the site. Due to this compensation, we can provide our users with a free comparison tool. Unfortunately we are unable to list every broker or exchange available, however, we do our best to review as many as possible.
