Spread betting vs CFD trading
Although spread bets and contracts for difference (CFDs) share some similarities, there are also important differences between them. Here we'll help you to understand the key differences between these two forms of financial derivative trading, and we'll also explore their potential benefits and risks to help you decide which product might be right for you.
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Main similarities between spread bets and CFDs
Spread bets and CFDs are both financial derivatives, so called because the value of these products is derived from an underlying asset. When you trade these products, you do not take ownership of any assets in the underlying market. Instead, traders of these products speculate on whether the value of an underlying asset is going to rise or fall in the future.
Traders buy or 'go long' when they expect the underlying asset to increase in price, and they sell or 'go short' when they expect the asset to decrease in value. They make a profit if the market moves in their favour, and they incur a loss if the market moves against them.
Spread bets and CFDs are also leveraged products, which means you deposit the margin (a fraction of the trade’s full value) while we put up the rest of the full notional value of the position.
Leverage increases your market exposure, potentially enhancing your profits. However, it's important to remember that leverage amplifies potential profits and losses equally, and you could lose all of your capital. It's therefore essential that you understand the risks of spread bets and CFDs before you start trading. If necessary, seek independent professional advice before placing any trades.
View our dedicated pages on spread bets and CFDs to learn more about each product.
Main differences between spread bets and CFDs
The biggest difference between spread bets and CFDs is how they are taxed. They also differ in terms of where they're available and how they're priced:
Taxation
Regional availability:
Currency:
Taxation: Both spread bets and CFDs are exempt from stamp duty as neither product involves ownership of underlying assets. The point of difference between the two products relates to capital gains tax (CGT). Spread bets are free from CGT, but profits from CFD trading are subject to CGT1.
Regional availability: Spread betting is available only in the UK and Ireland, whereas CFD trading is available in many countries, including the UK (where CFDs originated), Australia, Belgium, Canada, Denmark, France, Germany, Italy, the Netherlands, New Zealand, Norway, Singapore, South Africa, Spain, Sweden, and Switzerland, among others. Neither product is allowed in the US.
Currency: When you spread bet, you trade in your local currency. But with CFDs, you trade in the currency of the underlying market, potentially exposing you to foreign exchange (FX) risk.
Spread betting vs CFDs: Trade example
Now let's compare a spread bet and CFD trade on the same financial instrument. For this example we'll use the UK 100 - Cash, which is based on the FTSE 100, the UK’s benchmark stock index that tracks the performance of 100 leading British companies.
Whether you trade on the UK 100 via a spread bet or CFD, certain aspects of the trade will be the same. These include the sell price, the buy price, the spread (the difference between the sell price and buy price), and the margin rate (the percentage of the full value of the trade that you need to put up to open a leveraged trade). For the purposes of this example, let's assume the following:
Sell price = 7,277
Buy price = 7,278
Spread = 1
Margin rate = 5%
Let’s suppose you think the price of the UK 100 (and the underlying asset on which it's based) will rise, so you open a 'buy' position:
Spread betting | CFD trading |
|---|---|
You open a position with a stake size of £10 per point. For every point that the instrument moves up or down, your profit or loss will be multiplied by your stake amount. | You buy 10 CFDs or ‘units’ at the buy price. At the end of the contract, the difference between the opening and closing prices will be exchanged. |
The UK 100 has a margin rate of 5%, which means you deposit 5% of the total value of the trade to open a position. Whether spread betting or trading CFDs, your deposit would be the same:
Spread betting | CFD trading |
|---|---|
Margin: (5% x (£10 x 7,278)) = £3,639 | Margin: (5% x (10 units x 7,278)) = £3,639 |
After you place your trade, the UK 100 rises by 25 points. The sell price is now 7,302 and the buy price is 7,303. Your prediction that the index would rise in value proved to be correct, so you decide to close your profitable trade by selling at the new sell price of 7,302. Again, whether spread betting or trading CFDs, your profit would be the same:
Spread betting | CFD trading |
|---|---|
The UK 100 has moved 25 points in your favour. Multiply this gain by your stake size to calculate your profit (25 x £10 = £250). | The UK 100 has moved 25 points in your favour. Multiply this gain by the size of your position to calculate your profit (25 x 10 units = £250). |
Spread bets or CFDs: Which is right for me?
Spread betting | CFD trading |
|---|---|
No stamp duty | No stamp duty |
No capital gains tax1 | CGT applies, but losses can be offset against profits for tax purposes1 |
Commission-free, with an additional spread payable on shares and ETFs | Commission-free, apart from shares and ETFs |
Trade on margin, giving you leveraged access to the markets | Trade on margin, giving you leveraged access to the markets |
Speculate on both rising and falling markets | Speculate on both rising and falling markets |
Access to 13,000 global instruments | Access to 13,000 global instruments |
24-hour dealing | 24-hour dealing |
Prices derived from the underlying market | Prices derived from the underlying market |
*Tax treatment depends on individual circumstances. Professional clients only. Capital at risk.
Spread bets vs CFDs: In-depth comparison
Feature | Spread betting | CFD trading |
|---|---|---|
Tax treatment | Profits are exempt from stamp duty and CGT in the UK and Ireland1. | You don't pay stamp duty, but profits are subject to CGT1. |
Who can trade? | Available only to customers who reside in the UK or Ireland. | Available to customers in many countries globally. |
Short selling | You can go long or short, allowing you to speculate on both rising and falling markets. | You can go long or short, allowing you to speculate on both rising and falling markets. |
Shares and ETFs | When spread betting on shares and ETFs, there’s an additional spread, which is built into the prices displayed on our platform. | When trading CFDs on shares and ETFs on our platform, a commission will be charged to your account when you execute an order. This is in addition to the spread. |
Holding costs | Holding costs may apply, and can be positive or negative, depending on the direction of your bet and the applicable holding rate. | Holding costs may apply, and can be positive or negative, depending on the direction of your trade and the applicable holding rate. |
FX risk | Spread bets are placed in your local currency. With no currency conversion, there’s no FX risk. | CFDs are traded in the currency of the underlying market, potentially exposing you to FX risk. Your profit or loss may be negatively impacted by currency fluctuations and you may need to pay currency conversion fees. |
Calculating profit and loss | To calculate your profit or loss, find the difference between the price at which you enter the trade and the price at which you exit, then multiply this difference by your stake. | Your profit or loss is determined by the difference between the price at which you enter the trade and the price at which you exit, multiplied by the number of CFD units you traded. |
Leveraged trading | Spread bets are a leveraged product, which means you deposit the margin (a fraction of the trade’s full value) while we put up the rest of the full notional value of the position. Trading with leverage amplifies potential profits and losses equally, so it’s essential that traders understand and manage the risks involved. | CFDs are a leveraged product, which means you deposit the margin (a fraction of the trade’s full value) while we put up the rest of the full notional value of the position. Trading with leverage amplifies potential profits and losses equally, so it’s essential that traders understand and manage the risks involved. |
Timeframe | Spread bets are designed for short-term trading. Traders typically keep their positions open for a few minutes, days, weeks, or up to a month. | CFDs are designed for short-term trading. Traders typically keep their positions open for a few minutes, days, weeks, or up to a month. |
Forward contracts | Available for certain instruments | Available for certain instruments |
Range of markets | Around 13,000 instruments, including forex, stock indices, shares, ETFs, commodities, bonds, and share baskets. | Around 13,000 instruments, including forex, stock indices, shares, ETFs, commodities, bonds, and share baskets. |
Dividends | No dividends, but if you have an open position on a share or an index subject to a dividend, it will be reflected as a price adjustment on our platform. | No dividends, but if you have an open position on a share or an index subject to a dividend, it will be reflected as a price adjustment on our platform. |
Suitable for hedging | Yes | Yes |
Trading hours | 24/5 trading on forex and major stock indices. Trade during the underlying market hours on other instruments, and in pre-market trading on selected US stocks. | 24/5 trading on forex and major stock indices. Trade during the underlying market hours on other instruments, and in pre-market trading on selected US stocks. |
Corporate account | No | Yes |
Mobile app | For iPhone, iPad and Android | For iPhone, iPad and Android |
Available on MT4 | Yes | Yes, for forex, index and commodity CFDs |
In trading, the spread is the difference between a financial instrument's buy price and sell price. The buy price is typically higher than the sell price. The spread can widen or contract depending on market conditions. Read more about calculating the bid-ask spread.
Spread betting is available for customers in the UK and Ireland only. However, contracts for difference (CFDs) are available to trade in many countries.
Spread betting profits are free from capital gains tax, and there's no stamp duty to pay because you're not buying and selling any underlying assets. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Yes, leverage works in the same way for spread bets and CFDs. Traders use leverage – essentially a loan from a broker – to increase their market exposure and potentially enhance their profits. When you open a leveraged trade, you deposit the margin (a small portion of the full value of the trade) while your broker puts up the rest. It's important to remember that leverage amplifies potential profits and losses equally.
