Trading in the financial markets needs considerable capital to reap notable returns. However, not many traders afford to open large positions due to a lack of capital. This is where leveraged products like Spread Betting and Contract For Difference (CFD) enter the scene. While both are highly leveraged trading opportunities, choosing the best between Spread Betting vs CFD becomes even more challenging.
While CFDs and spread betting are often seen relative to each other, there are many fundamental nuances that differentiate them. So, if you’re a beginner and unsure about choosing between CFD trading vs Spread Betting, this writeup is exclusively for you.
In this detailed Spread Betting vs CFD trading guide, we will outline the key differences, similarities and use cases of both these margined products to help readers understand which can be a profitable choice for them.
What Is Spread Betting?
Spread Betting is a popular OTC derivative product that lets you speculate on the price movement of an underlying asset without owning it. As a derivative product, it doesn’t require huge capital to invest upfront.
With Spread Betting, traders can access 18,000+ financial markets, including Forex, Commodities, Stocks and Indices. To place a spread bet, you must make a small initial deposit, also known as Margin, to open leveraged (Large) position. However, profits and losses are calculated on full position size, not on Margin.
It works by tracking the asset’s value so that a trader can take a position on the current market price and speculate whether it will rise or down. If speculations go right, they will profit; if not, they will suffer losses.
What Is CFD?
Contracts For Differences (CFDs) are derivative products that work exactly like Spread Betting, in which you don’t own an asset but speculate on the price movement. However, there is a major difference between the two.
While Spread betting speculates on the asset’s future prices, in CFD, a trader agrees to exchange the difference in the asset’s price from the point at which the position is opened to the point at which it is closed.
Due to its features like a low capital requirement and high-profit potential, CFD trading has gained momentum in the last few years. Today, it is widely used in popular financial markets, including Forex, Commodities, Cryptocurrencies, Indices and Stocks.
Spread Betting vs CFD: Head-To-Head
| Features | Spread Betting | CFD |
| Nature | Derivative Product | Derivative Product |
| Leveraged Trading | Yes | Yes |
| Expiration Date | Yes | No |
| Available in Countries | UK and Ireland Only | Global |
| Applicable Taxes | Exempted from Capital Gain Taxes and Stamp Duty | CGT Taxes & Stamp Duty Applicable |
| Direct Market Access (DMA) | No | Yes |
| Currency | GBP | No Restriction |
| Fees & Commission | No Commission, Only Spread | Commission & Spread |
| Corporate Accounts | No | Yes |
CFD vs Spread Betting: What Are The Key Similarities?
Despite several differences and distinct use cases of CFD and Spread Betting, there are many similarities that make them both count under one umbrella term, i.e., Derivative Products.
So, let’s take a look at some key similarities between Spread Betting and CFD Trading;
- Both derivative products allow traders to open large positions with low initial deposits (Margin).
- Both allow users to open positions on the price movement of an asset at any time of the day.
- As you do not own assets, both are exempted from stamp duty charges.
- Both products allow traders to go long or short.
- Choose from a range of online tools along with MT4.
- Both products provide exposure to all major financial markets, including Forex, Commodities, Cryptocurrencies, Stocks, Indices & ETFs.
What Are The Major Differences Between Spread Betting and CFD?
The primary goal of writing this detailed Spread Betting vs CFD is to focus on the key differences between these financial derivative products.
With each difference in mind, you can make a more informed decision about whether to choose CFD trading or Spread Betting and which proves to be profitable.
| Features | Spread Betting | CFD Trading |
| Taxes | Exempted from Stamp Duty & CGT in the UK & Ireland | Stamp Duty Charges Not Applicable, while CGT liable |
| Commission | No commission | Applicable |
| Spreads | Spreads built into prices | Fixed or Variable spreads |
| Trade Sizes | GBP per point | Based on No. of Contracts |
| Profit & Loss Calculation | Difference between entry and exit price multiplied by Stake | Difference between entry and exit price multiplied by no. of CFDs and size of the contract. |
| Dealing Currency | Base Currency Only | USD, GBP, JPY, CHF, etc. |
What Are The Advantages Of Spread Betting Over CFD?
As a leading derivative product, Spread Betting has several advantages that are enough to overshadow the role of CFD trading. Through this CFD trading vs Spread betting guide 2023, let’s take a look at some benefits of spread betting over CFDs.
Tax Efficient
The first thing that comes into traders’ minds while making good profits is how much tax they are subject to paying. In this case, Spread betting is tax efficient in comparison to CFD trading.
It is exempted from Capital Gains Tax (CGT) and Stamp duty charges, making it low-cost than those heavily taxed CFD trades.
Commission-free
While CFD trading incurs heavy commission on each trade order placed on the broker’s platform, Spread Betting is commission-free. The only charge involved in Spread betting is ‘Spread Charges,’ which are already included in the prices. Therefore, making it the cheaper option than CFD.
Greater Control Over Currency Exposure
The spread betting is always denominated in the trader’s base currency, which gives greater control over currency exposure. All the activity will be in the base currency. For instance, your account balance will be displayed in base currency, and your earnings and transaction will also be displayed in base currency.
Meanwhile, currency exposure risk is greater in CFD trading as it is directly exposed to currency price fluctuations.
What Are The Advantages Of CFD Over Spread Betting?
As we talked about the advantages of Spread Betting above, that doesn’t mean CFD isn’t profitable. It is even more profitable in some aspects. Let’s discuss them all.
Tighter Spreads
The absence of commission in Spread Betting results in wider spreads in comparison with CFD. Meanwhile, the Spread charges in CFD are lower and more competitive.
With comparatively lower spreads, CFD traders can enjoy the benefits of cashing out more of their profits. CFD has the upper hand over Spread Betting, particularly when you consider trading opportunities.
Better For Hedging
CFD is the better option to hedge your trade position than Spread Betting. As it offers Direct Market Access, traders can offset their losses against profits for Capital Gain Tax (CGT).
Hedging is available in Spread Betting too, but it is limited to some extent, with the major drawback of losses being non-tax deductible.
Price Transparency
As CFDs directly mirror the underlying markets and futures, it becomes easy to see where CFD pricing originates. At least, the prices seem more reasonable and more similar to underlying prices than the comparative spread. Thus, it provides high transparency in asset prices.
Spread Betting vs CFD: Which Is Better Option For Trading?
As the functioning of both CFD and Spread Betting are nearly similar, there are many other aspects that make one take the lead over the other. However, determining which is better depends solely on your risk tolerance, trading style and strategy.
Let us help you determine which can be a better option for you between CFD Trading vs Spread Betting in a way easier way.
Choose Spread Betting If You Want
- Tax benefits, as there are no Capital Gain Taxes and Stamp Duty Taxes applicable.
- Commission-free trading experience.
- Greater control over currency exposure
Conversely, Go For CFD trading If You Want
- Direct Market Access
- Ability to offset losses against profits
- Trade on both rising and falling markets
Conclusion
As we are concluding this Spread Betting vs CFD guide, hope you gained a good understanding of the topic. While the functioning of both these derivative products seems similar, there are many considerable differences every potential trader should keep in mind.
So, for readers who are still confused between the two, here’s a quick key takeaway of the topic – Spread Betting vs CFD:
- Spread Betting has an expiration date, while CFD doesn’t.
- CFD is eligible for CGT taxes, while Spread Betting is exempted from taxes.
- Spreads in CFD are fixed and flexible, while it is already built-in prices in Spread Betting.
- There are commissions in CFDs, while Spread betting is commission-free.
So, whether you choose CFD or Spread Betting, you will always need a reliable trading platform like InvestFW. The broker offers the lowest spreads and higher leverage on CFD trade.
FAQs
Is Forex Spread Betting?
Forex can be traded both through Spread Betting and CFD. Forex Spead Betting allows traders to make profits by speculating on the price movements of the currency pairs.
Are Spread Betting Profits Taxable?
Spread Betting is a tax-free derivative product that is exempted from Capital Gains Tax (CGT) and Stamp duty charges, making it more low-cost than those heavily taxed CFD trades.
Is Spread Betting Legal In The US?
No, Spread Betting is not legal in the US, meaning American residents are not allowed to spread bet. The product is exclusively available and limited to UK and Ireland traders.
Which Is Better Spread Betting Or CFD?
As the functioning of both CFD and Spread Betting are nearly similar, there are many other aspects that make one take the lead over the other. However, determining which is better depends solely on your risk tolerance, trading style and strategy.
Are CFD Risker Than Stocks?
CFD is riskier than stocks as it doesn’t give you ownership as you get when you buy a company’s share. As a high-leverage product, you could lose all your investment at once, while stock investment remains the safe option.
Which Is Better: Forex Or CFD?
The main difference between CFD and Forex is that the former involves different types of contracts from various markets, such as indices, energy, and metals, whereas Forex is limited to currency trading. So, opting for CFD over Forex will give you exposure to a range of financial markets where you can diversify your portfolio.
How Do I Buy CFD?
CFD is a derivative product offered by the brokerage platform. You can trade CFD within your trading platform.
