CFD trading vs spread betting
Spread betting and CFDs are very similar, so how should investors choose between the two? Quite often you will find that investors go for one or the other based on their own personal preference.
In both instances traders can go ‘long’ or ‘short’ based on how they anticipate the market will move. You never own any of the physical assets and therefore the good news is that UK traders aren’t liable to pay any stamp duty.* Both forms of trading can also include a high degree of leverage, which can increase your profits. However, this also means that they can equally amplify losses too.
What is spread betting?
With spread betting, the trader is not actually buying or selling a market. Instead, they are betting on whether they think a market will increase or decrease in price. They are given the option to take a stake and ‘buy’ or ‘go long’ if they think that the price for the market will rise, or they can ‘sell’ or ‘go short’ if they think the price is to fall. Traders can bet per point on which way they predict the market will move. For every point that the market moves up or down, you win or lose a proportional sum. Traders only have to put down a deposit, which is a fraction of their bet – there is no commission fee required.
To put spread betting simply: the more correct you are about a market’s movement, the more money you make.
What is CFD trading?
A CFD, or contract for difference, allows traders to trade individual markets. But rather than make the physical purchase with a broker, you open a contract. The contract will replicate the profit or loss of the equivalent physical purchase. In this way it is extremely similar to trading within the actual market.
CFDs can be used to trade forex, shares, stock indices, energy contracts, metals and other commodities, and more. They are quick and accessible, removing the need to trade through a traditional broker.
You enter into the contract at one price and close at another, the difference in prices representing your profit or loss. With CFDs you pay a deposit designed to cover your potential downside, merely a fraction of the full contract value.
Exactly like in spread betting, you can ‘buy’ or ‘go long’ if you think that the price for the market will rise, or alternatively you can ‘sell’ or ‘go short’ should you suspect the price will fall.
What are the similarities between CFD and spread betting?
Ability to go long or short
With both spread betting and CFD trading you can go long to profit from rising prices, or go short to profit from falling prices.
Trading on margin
Both spread betting and CFD trading allow you to trade on margin, gaining leverage on your investment. This will enhance the potential return on your investment capital, but equally will amplify potential losses.
No stamp duty
Since you do not own physical assets in both instances, you are not eligible to pay stamp duty.*
When it comes to investing, risks are inevitable. However, having a decent strategy behind you is a great way to try and overcome these obstacles. With that said, both CFD trading and spread betting can result in significant losses. One way Intertrader can help to protect you is through the use of Stop Loss orders. A stop is an order to close your position automatically when the price reaches a specific level, and is available for both CFD trading and spread betting. While this is an important risk management tool, stops can be subject to gapping and slippage in volatile market conditions.
There are no commission fees when spread betting or trading CFDs with Intertrader. Purchasing CFDs gives you the exact same exposure as buying shares, but only requires that you supply a margin deposit designed to cover any potential loss if the share price moves against you. Our dealing charge is added to the underlying market spread so there is no extra commission to pay. (The only exception is if you are trading forex CFDs on the MT4 platform, where you trade at the interbank market spread and pay a commission per trade.)
Similarly our only charge for spread betting is in the dealing spread, i.e. the difference between the price at which you buy a market and the price at which you sell. The spread is in effect your cost of trading that market. There are no extra commissions or charges to use our dealing platform or other trading tools. It is all contained in the dealing spread.
Unlike some other investment products with rigid expiry times, spread betting and CFD trading both give you a flexible trading timescale. With Intertrader you can choose between trading on futures contracts, which have a stated expiry date and time at which your position will automatically close, and Rolling Daily contracts, which roll indefinitely from day to day. In both cases you are free to close your position whenever you want before any stated expiry time.
With spread betting you can trade from as little as £1 per point. With CFD trading you can open up a position for as little as one contract, the equivalent of £1 or $1 or €1 per point. This makes both products suitable for people who prefer smaller trading positions.
What are the differences between CFD trading and spread betting?
Unlike with spread betting, where a trader bets an amount of money per point on the price movement of the underlying market, with CFD trading a trader buys a contract that replicates the potential risk-reward of a trade in the underlying market.
Capital gains tax
For UK traders, spread betting is exempt from both stamp duty and capital gains tax – any profits you make are tax-free.* CFDs are exempt from stamp duty, but not capital gains tax. However, any CFD losses can be offset against future profits for tax purposes. With spread betting, a loss is a loss, period.
CFD trading is sometimes seen as more ‘realistic’ because it more closely mirrors physical trading. Although, with Intertrader, the cost of trading and risk-reward profile of spread betting and CFD trading remain the same.
Trading in currency
Unlike spread betting, where all your trades are made in your account currency, with CFD trading you trade in the currency of the underlying market, which is then converted into your account currency if necessary. This means that CFD trading is vulnerable to exchange rate fluctuations as well as price changes in your underlying market.
Is spread betting or CFD trading for me?
The main advantage of spread betting over CFDs is tax-free trading.* You also get to trade in a uniform currency, and some traders regard the ‘per point’ method as simpler for calculating your running profit and loss.
CFD trading more closely reflects physical trading, and some traders feel it gives them more control. You could also choose CFDs if you want to offset losses against future wins for tax purposes, or you want to employ hedging strategies.
Both products give you easy access to a wide range of global markets and leveraged trading, and both can be suitable for short and long-term investors.
*UK taxpayers only. Tax treatment depends on the individual circumstances of each client and may change in the future.
Published: 12 June 2018
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.