The ultimate face-off: Spread betting vs CFDs

Understanding the nuances between spread betting and CFD trading is essential for any trader. These strategies each offer their own set of benefits and carry distinct risks, highlighting the importance of grasping their characteristics.

Let’s simplify these complex financial concepts, organizing them into clear, approachable sections.

You'll also learn about the basics of spread betting and CFD trading, the key differences and similarities between them, and find answers to frequently asked questions.

The goal here is to deliver straightforward, accurate information to assist you in navigating your trading decisions with confidence.

What is spread betting?

Spread betting, often referred to as financial spread betting or FSB is a method where investors speculate on whether the price of various financial instruments will rise or fall. This speculation is made from the moment their bet is placed.

In spread betting, investors have the freedom to decide the amount they wish to risk. It is known for being a tax-free, commission-free activity, offering opportunities to speculate in markets that are either rising (bull markets) or falling (bear markets). The bet placed by an investor is not transferable to others.

Companies offering spread betting set buy and sell prices. Investors take a position: they 'buy' if they anticipate market growth or 'sell' if they expect a market decline. What sets spread betting apart from traditional investing is its nature as a betting activity. It's different from fixed-odds betting as it doesn’t rely on a specific event occurring.

Investors have the flexibility to close their bet at any point, allowing them to secure profits or cut losses. FSB is considered a marginal derivative product, enabling bets on price movements across a broad range of financial markets and products. These include stocks, bonds, indices, and currencies. Investors can opt for long or short bets, based on their market direction predictions.

Read also this interesting article: What is a bull market? A complete beginner’s guide

What is CFD trading?

CFDs, or Contracts for Difference, are agreements between investors and financial institutions. In these contracts, investors speculate on the future value of an asset. The financial gain or loss is the difference between the asset's price at the beginning and the end of the contract, settled in cash.

Unlike traditional trading, CFDs don’t involve the actual delivery of physical goods or securities. Instead, the value of the contract lies in its ability to be traded while it's active. Essentially, a CFD is a tradable security formed between a client and a broker. They exchange the difference in the asset's price from when the trade starts to when it ends.

CFDs offer a way to trade on the price movements of assets, similar to futures. However, they are not futures contracts. One key difference is that CFDs don’t have predetermined expiration dates or prices. Instead, they operate like regular securities, with fluctuating buy-and-sell prices.

The trading of CFDs happens over-the-counter (OTC). A network of brokers manages this, coordinating the market's demand and supply for CFDs and setting prices accordingly.

Take the time to check out this article: Bear Markets: A Complete Beginner’s Guide

Differences Between Spread Betting and CFD Trading

1. Tax-efficiency: One of the main differences lies in tax treatment. Spread betting is often tax-free, making it a more tax-efficient option. However, CFD trading may be subject to capital gains tax.
2. Our charges: With spread betting, the cost is mainly in the spread – the difference between the buy and sell price. CFD trading, on the other hand, might include commissions or financing charges, depending on the broker.
3. Other charges: Both spread betting and CFDs may incur additional costs like overnight funding charges. However, these vary depending on the specific product and market.
4. Deal sizes: Spread bets usually allow smaller deal sizes compared to CFDs. This makes spread betting more accessible to a broader range of investors, especially those with smaller bankrolls.
5. Calculating profit and loss: In spread betting, profits and losses are determined by the stake size and the number of points movement. In CFD trading, profits and losses depend on the number of contracts and the value per contract.
6. Corporate account available: While CFD trading is often available for both individual and corporate accounts, spread betting is usually restricted to individual traders.
7. Currency deal size: The deal size in spread betting is typically denominated in the trader's base currency, simplifying currency risk management. In CFD trading, deal sizes can be in various currencies, adding a layer of currency risk.

Key Similarities of CFDs and Spread Betting

• Leveraged products: Both CFDs and spread bets are leveraged products, meaning they allow traders to gain larger market exposure with a smaller initial investment. The value of both these products is derived from the price movements of an underlying asset.
• No ownership of underlying assets: When trading either CFDs or spread bets, investors do not own the assets in the underlying market. Instead, they are speculating on the price movements of these assets.
• Long and short positions: In both CFD trading and spread betting, traders have the option to take long or short positions. Going long means you expect the value of the underlying asset to increase, while short selling is based on the expectation of a decrease in value. Profits or losses are determined by the difference between the closing and opening values of the asset.
• Spread as a cost factor: In spread betting, the spread – the difference between the buy and sell prices – is a critical factor. This spread is set by the spread betting company and represents the cost of the trade. The price movements of the underlying asset are measured in basis points, giving traders the choice to opt for long or short positions based on their market expectations.

If you're keen to expand your trading knowledge, you might also like to read our insightful article: What is CFD trading? (a full guide with benefits, risks and CFD trading examples).

Spread betting vs CFDs FAQs

1. How do spread betting and CFDs differ in terms of ownership?

In spread betting, you never own the underlying asset. You merely speculate on its price movement.

With CFDs, while you still don't own the asset, you enter into a contract that reflects the asset's market movements and behaves much like owning the stock without the rights associated with ownership.

2. Is spread betting or CFD trading better for short-term investments?

Both spread betting and CFD trading can be used for short-term investments. The choice depends on your tax situation, level of experience, and investment goals.

3. Are profits from spread betting and CFDs taxed in the same way?

Tax treatment can vary by country. In the UK, for instance, spread betting is tax-free, meaning there is no capital gains tax on profits. However, CFD profits are subject to capital gains tax.

4. Can I trade commodities, stocks, and indices with both Spread Betting and CFDs?

Yes, both spread betting and CFDs allow for trading across a variety of markets, including commodities, stocks, indices, and more.

5. What are the risks associated with spread betting and CFDs?

Both spread betting and CFD trading involve high risk due to leverage, which can amplify profits and losses. It's possible to lose more than your initial investment.

6. Do spread betting and CFDs offer leverage?

Yes, both allow for leveraged trading, which means you can open a large position with a relatively small amount of capital.

7. Can I go long (buy) and short (sell) with both spread betting and CFDs?

Yes, both spread betting and CFD trading allow you to take both long and short positions.

8. What kind of trading platforms can I use for spread betting and CFDs?

Most brokers offer online trading platforms for both spread betting and CFD trading, many of which come with analytical tools, real-time data, and risk management features.

Bottom line

Understanding the distinctions and similarities between spread betting and CFD trading is crucial for informed trading decisions. While both offer leveraged exposure to a range of financial markets, they differ in key areas like tax efficiency, costs, and how profits and losses are calculated.

Whether opting for spread betting or CFD trading, it's important to remember both involve high risks due to leverage. The choice between the two should be based on your tax circumstances, investment goals, and level of experience.

For those looking to make their trading more tax-efficient, exploring a spread betting account with markets.com could be a beneficial step.

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Stay informed, stay ahead, and make every trade count.

Remember, in the dynamic world of trading, staying educated and adaptable is key to success.

Happy trading!

“When considering CFDs for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”