Difference Between CFD Trading vs. Spread Betting

CFD trading and spread betting are two of the most popular strategies for trading commodities, forex, shares, and more. While both methods have a lot of similarities, every trader should know the key differences that set them apart.

In this guide, we cover the differences and similarities between CFD vs. spread betting methods of trading, so you can decide which option works best for you.

Also read: Best Spread Betting Platform in UK

The Main Differences between CFD vs Spread Betting

Here is an overview of some key differences between CFD vs. spread betting:

  • CFD trading profits have a capital gains tax. Spread betting is tax-free.
  • CFD trading can have commissions and fees. Spread betting is always commission-free.
  • CFD contracts are held indefinitely. Spread bets always have a fixed expiration date.
  • CFDs are traded on the market. Spread bets take place over the counter with the broker.
  • CFDs are required to be placed in the currency of the underlying asset. Spread bets don’t have a designated currency.

CFD Trading

A CFD, or a contract for differences, allows investors to trade in the direction of securities over the short-term and pay the difference between the open and closing trade.

Below are some key elements of how CFD trading works.

  • Tax Implications: You pay capital gains tax on the profit, but it’s not subject to stamp duty. Losses can offset gains from CFD trading profits.
  • Commissions and fees: Many brokers offer commission-free trading but others will charge commissions or holding fees.
  • Spreads: Paying a spread is required.
  • Rising or falling markets: You can either go long or short to profit in either market direction.
  • Leverage: Margin varies by asset for leveraged products
  • Expiration date: There is no expiration date. Long and short positions can be closed whenever.
  • Direct market access: Direct market access with the ability to transfer CFDs between traders.
  • Profit calculation: The profit or loss equals the difference between the opening and closing price multiplied by the investment amount.

Below are the main advantages and disadvantages of CFD trading on the market.

Pros:

  • Increased transparency with direct market access
  • No expiration dates
  • Ability to offset profits with losses for capital gains tax
  • Global market
  • Can speculate on rising and falling markets
  • The underlying market determines prices
  • Most brokers deal 24/7

Cons:

  • Sometimes it requires commissions and fees
  • Pay fees for currency conversion on forex
  • Capital gains tax is required on profits

Spread Betting

Spread betting includes various types of wagering strategies on the outcome of a single event where the accuracy of that wager determines the pay-off.

Below are some key elements of spread betting.

  • Tax Implications: You don’t pay capital gains tax or stamp duty. Losses are not eligible for offsetting capital gains from other instruments.
  • Commissions and fees: There are no commissions or fees.
  • Spreads: Paying a spread when trading is required.
  • Rising or falling markets: You can either go long or short to profit in either market direction.
  • Leverage: Margin varies by asset for leveraged products.
  • Expiration date: Your contract has an expiration date but can be closed at any time.
  • Direct market access: Trades happen over the counter with a broker. Spread bets cannot be transferred.
  • Profit calculation: The profit or loss equals the difference between the opening and closing price multiplied by the investment amount.

Below are the main advantages and disadvantages of spread betting on the market.

Pros:

  • No paying commissions or transaction fees
  • No fees for currency conversion or forex bets
  • No capital gains tax in the UK
  • Can speculate on rising and falling markets
  • The underlying market determines prices
  • Most brokers deal 24/7

Cons:

  • Lack of transparency in over the counter dealing
  • Varying expiration dates
  • Only available in Ireland and the UK
  • No offsetting trading profits with losses

The Verdict

CFD trading and spread betting are two financial derivatives that allow you to speculate on the future price of an asset without having to own it.

Before picking a side in the CFD vs spread betting comparison, you should know the key differences between each strategy. CFD trading is not limited to Ireland and the UK, and contracts never expire. Spread betting doesn’t have capital gains tax or fees for currency conversion of forex betting.

Don’t rush into either strategy. Instead, we recommend taking time to understand what each method offers and what limitations you can expect before trading stocks or forex.

Make sure to check out our latest article: Best CFD Trading Platforms UK