Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Spread betting vs share dealing

There are a number of ways to trade shares in the stock market. You can choose to buy and sell shares directly over an exchange or you can use derivative products, such as spread betting, to speculate on the underlying price movements if you do not want to pay the full value upfront.

A popular image of the active spread better is of someone glued to their trading screens for hours a day watching every price move; however, spread betters can also take a more relaxed and longer-term approach. Read on to learn more about the differences between spread betting and share dealing, including examples of spread betting costs on our Next Generation trading platform.

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What are the differences between spread betting and share dealing?

Using derivative products to trade on shares, such as spread betting, differs from the traditional investment approach of buying and holding shares in the long-term. Given the interest many spread betters have in individual shares in stock markets, is there any reason why we shouldn’t use spread betting to take positions on shares over weeks and even months? Taking this one step further, why would you buy individual shares when you can spread bet on them?

Below is a summary table of the main points that cover the debate on spread betting vs share trading​, some of which we explore in further detail below.

Spread betting on shares Traditional share dealing
Use of margin/leverage Yes No
Position cost Deposit required Full value upfront
Additional costs Tax-free trading*, holding costs Commission, capital gains tax and stamp duty
Strategy Long or short (buy or sell) Long-term (buy and hold)
Ownership of asset No Yes
Corporate actions Dividend adjustments, stock splits, withholding taxes Quarterly dividends, voting rights, other shareholder rights
Access to other markets Yes - commodities, indices, forex, treasuries No - shares only

Use of margin/leverage

The first difference is that when spread betting on a share, you can utilise leverage​, which means that you only need to pay a percentage of the full value of the trade, known as a deposit. Any profit or loss you make will be magnified, relative to a share’s price fluctuations.

In traditional share dealing, investors must pay the full value of the position upfront. This can drain you of a large amount of capital depending on the share, with Berkshire Hathaway and Amazon ranking among the highest share prices. In October 2020, Berkshire Hathaway’s share price reached an all-time high of approximately $320,000, making this the highest ever publicly-traded stock.

While spread betting may seem like an easier and more cost-efficient option on the surface, trading on margin can result in substantial losses if the market moves against your favour. Traders should be aware of the risks of margin before opening positions and there are a number of appropriate risk-management techniques that can be used to minimise losses, such as stop-loss orders​.

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Costs

Let’s look at the numbers and see how the costs of spread betting in the longer-term compare with buying and holding company shares.

Example of buying physical shares:

Let’s take a fictional, medium-sized company called 'ABC', which is currently trading on the stock market at 299.5p to sell and 300p to buy.

An investor has around £1,500 to invest so they decide to buy 500 shares. This means that they have invested £1,500 in ABC, but on top of this, there are some trading charges to pay. Shareholders must pay commission and this amount can vary from very little to quite a lot, depending on your stockbroker and the services offered. Let’s assume that the investor’s stockbroker charges a rate of £10 for commission​ on this trade. There is also stamp duty, which at the time of writing was 0.5% on shares, so that’s another £7.50 in charges on this transaction.

Now, let’s fast forward a month into the future.

Our investor is delighted that ABC's share price has risen by 10% and so they decide to sell. The market price for ABC has risen to 329.5p/330p and they sell 500 shares at 329.5p per share, receiving £1,647.50. There is usually a charge for selling through your stockbroker, so let's assume this transaction costs £10 again. Now that our investor has concluded the sale of their shares, let's look at their total profit.

To buy the shares, including stamp duty and commission, they had to spend £1,517.50. When selling, after paying commission again on the sale, they received £1637.50, so the profit on this deal was £120. This is a substantial return after just one month, but was there a more cost-effective way of doing this?

Example of trading on shares with spread bets:

Now, let’s look at taking on a similar position by spread betting shares. The spread betting price quote on ABC is slightly wider than the market, so we will use 298.5p to sell and 301p to buy.

To have the same exposure as buying 500 shares, our investor needs to buy £5 per point. If you look at the maths here, this makes sense: £5 x 301= £1505. So, the position value of the shares using a spread bet is equivalent to £1505 worth of shares. If the value of the shares increases or decreases, then the spread bet will follow.

There's no commission or stamp duty to pay when spread betting stocks and, because spread bets require margin, our investor does not need to tie up all their capital. However, it is important to remember that the loss you could make on a spread bet may exceed the amount of margin that you used to enter into that bet, meaning you can lose more than your deposit. Let’s assume that the margin deposit for this particular share is 10% of the position value. This means that, in this case, £150.50 would be allocated from the investor's spread betting account to open a spread bet worth £1,505 on company ABC.

There are still some charges that occur when spread betting on a share. If a trader holds their position overnight, they will be charged a spread betting holding cost. This rate is usually based on Libor (London Interbank Offered Rate) plus a percentage, which will vary from broker to broker. Let’s assume that our investor’s broker charges Libor + 2.5% and Libor is currently at 0.45%. This means that their financing will cost 2.95% if held for a year, but this is broken down to a daily rate so the daily cost for this spread bet is around 0.0081%. On a position value of £1,505, this equates to about 12p per day. Over the month, this would equal financing charges of around £3.65 that would have been deducted from the investor's account, leaving them with an overall profit of £133.85. This amount is still more than they would have made buying the shares through a traditional stockbroker, plus the investor did not have all of their £1,500 tied up in the shares.

Read more about our various trading costs.

Short and long-term positions

If you were going to hold a long-term spread bet position on a stock for many months or even years, the cost of financing charges would likely outweigh any savings in stamp duty or commissions. However, for short to medium-term trades, spread betting on a share can be a viable and much more cost-effective option than buying through more traditional means.

When using spread bets, you have the option to trade both sides of the market. This means that you can go long (buy) and go short (sell) depending on the position that you would like to take and your overall trading goals. Shorting stocks​ is especially popular with day traders, scalpers and for other short-term strategies, given that the stock market often has high liquidity.

On the other hand, investors are restricted to buying and holding the asset when share dealing. This means that they can only take one side of the market and hope that the share price will increase over time, allowing them to profit over time. As with all trades, it is difficult to know in which direction a share will move, which could end up with investors losing money.

Spread betting vs share trading

You should consider the above points when deciding whether to buy and hold shares or trade them in the short-term. Both options provide advantages and drawbacks, and trading with derivatives can present a number of risks in particular. Consult our guide to risk-management in trading before opening a potentially risky position and read more of our spread betting examples.

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FAQS

Can I spread bet on shares?

With a spread betting account, you can speculate on the price movements of 9,000+ shares and 1,000+ ETFs. Learn how to spread bet shares tax-free in the UK*.

Is spread betting cheaper than share dealing?

When share dealing, you must pay the full value of the position upfront, whereas spread betting allows you to trade on margin, meaning that there are fewer initial costs. However, you should still take into account overnight holding fees and the spread cost with a spread betting account. Find out more about our spread betting costs.

Do you own shares when spread betting?

When spread betting shares, you don’t directly buy or sell the asset, therefore you’re not taking physical ownership. Instead, spread betting allows you to gain exposure to the underlying share and its fluctuating price movements with less starting capital than if you were to buy the same number of shares outright. Learn how derivative trading works.

How do dividends compare for spread betting and share dealing?

As share dealing gives you ownership of a security, you may receive dividends from the company, if its board agrees to pay a dividend to shareholders. If you hold an open spread betting position for a share when a dividend payment is made, an adjustment will be made, and capital may be credited or debited to your account. Learn about our corporate actions for more details and examples.

What’s the difference between CFDs and buying shares outright?

CFDs work in a similar way to spread bets, as a form of derivative trading. With CFDs, you also don’t own the underlying share or have to pay the full value of the trade upfront. However, with CFD trading, you also have to pay capital gains tax. Read more on CFDs versus share trading.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.