Spread Betting vs CFD Trading - What You Need to Know!
In this article, we explain the difference between spread betting and CFD ( Contracts for Difference) trading, as well as some of the major factors you need to know about when choosing CFD or spread betting products.
Whether you are trading Forex, Stocks or Indices, understanding the vehicles available to you to speculate on such markets is a critical step towards successful trading.
Before we look at the similarities and differences of spread betting vs CFD trading, it is important to first understand what spread betting is and what CFDs are. Let's take a look.
Table of Contents
What Is Spread Betting?
When spread betting, the trader is not actually buying or selling an asset. Instead, the trader is betting on where they think the price of a particular market will move to. The trader is given an option to place a bet size per point the market moves.
For example, if a spread better believes the currency pair GBPUSD will rise, they would enter a buy, or long, position. If the trader used a bet size of 10 GBP per point, then every one point move higher in the price of the GBPUSD would result in a 10 GBP profit. The trader would lose 10 GBP for every point the market moved in the opposite direction of their trade.
*Spread Betting is only available for accounts opened with Admiral Markets UK Ltd which is authorised and regulated by the UK Financial Conduct Authority.
What Is CFD Trading?
When trading with CFDs, the trader is trading a contract based on the price of the underlying market. Instead of a trader buying physical assets from their broker (such as currency or company shares), or betting on the market, they can simply enter a Contract For Difference with their broker instead. The contract is to exchange the difference in the value of an asset from the price of the contract when it is first opened, to the price when the contract is closed.
The value of a contract differs depending on the market you are trading. For example, using the same example from the spread betting explanation above, if a CFD trader bought 10 contracts, or 10 CFDs of GBPUSD, then every one point move higher in the price of GBPUSD would result in a 100 USD profit and every one point move lower would result in a 100 USD loss. This is because when trading currencies one CFD is equivalent to 100,000 units of currency.
Both spread betting and CFD trading allow traders to speculate on the price direction of a particular market using leverage, thereby enabling traders to open positions with only a small deposit of the full trade size. Of course, the same also applies to losses. Traders risk losing their deposit faster when using leverage – so use it cautiously!
While there are many similarities there are also some core differences between these two types of trading, as the spread betting vs CFD trading table below shows:
- Tax laws depend on individual circumstances and are subject to change. Tax law may differ in jurisdictions outside of the UK.
What Are the Key Differences Between Spread Betting and CFD Trading?
The spread betting vs CFD table in the last section shows the main similarities and differences between the two trading vehicles. However, there are two particular differences between spread betting and CFDs that traders should be especially aware of.
Tax Treatment
For UK residents, spread betting is free from stamp duty and capital gains tax. For CFD trading no stamp duty is payable but you do have to pay capital gains tax. While some traders may be enticed by the lower levels of tax associated with spread betting there are some disadvantages when compared with CFD trading.
Spread bettors cannot offset any losses for tax purposes. CFD traders have the ability to offset any losses against future profits. For example, if you acquired a property and made a capital gain of £30,000 but then lost £10,000 on your CFD trading, it would result in a lower net capital gain of £20,000 which means you may end up paying less capital gains tax overall. This is a general example and does not take individual circumstances into account. You should consult a professional advisor regarding your specific tax situation.
Availability
As mentioned above, spread betting is only available to individual residents of the UK and Ireland.
Trading Platforms
Most spread betting providers have their own unique trading platforms whereas there are many more CFD brokers who use the world's most popular trading platform, MetaTrader.
A screenshot showing the Admirals MetaTrader 5 platform with an open FTSE 100 trading ticket and Symbols window.
This is important as CFD trading via MetaTrader allows users to access advanced features such as:
- Custom-built indicators allowing you to experiment with your own trading ideas.
- Trading strategies for purchase from the MetaTrader community for those interested in automated trading.
- Social trading signals so you can copy other traders if you like their historical results.
- The ability to trade on a platform with a worldwide interactive community where you can share trading ideas and grow as a trader.
*Spread Betting is only available for accounts opened with Admiral Markets UK Ltd which is authorised and regulated by the UK Financial Conduct Authority.
Spread Betting vs CFD Trading
So which is better, CFD trading or spread betting? When choosing between CFDs and spread betting there are many things to take into consideration. While the tax situation may be the most obvious difference between the two, there are other considerations that could have a bigger impact on your overall profitability.
For example, spread betting and CFD trading allows for trading on the same markets, including Forex, Stocks, Indices, Commodities and Cryptocurrencies. However, CFD traders may have the option to trade directly with the broker's liquidity providers (typically tier-one banks and hedge funds) via ECN (Electronic Communication Network) or STP (Straight Through Processing) technology. This enables traders to receive institutional-grade spreads and lower spreads mean lower costs, which could result in higher profits.
As spread betting involves betting on the view of prices either going up or down, it cannot offer the ability to trade with banks or hedge funds and receive institutional-grade spreads. As CFDs involve trading the underlying market price via contracts, traders can access the ability to trade directly with banks and hedge funds to receive lower spreads and lightning fast execution.
For example, with the Admirals Zero.MT4 account, traders can trade currencies via STP technology and receive spreads from 0 pips plus commission, as well as trade on Spot Metal CFDs across the Admirals MetaTrader platform for PC, Mac, Web, Android and iOS - meaning you could be trading directly with tier-one banks while on the move! To open an account, visit Account Types.
Why Trade with Admirals?
✔️ Admirals is authorised and regulated by the UK Financial Conduct Authority (FCA), the Cyprus Securities and Exchange Commission (CySEC), the Jordan Securities Commission (JSC) and others.
✔️ Open an Invest.MT5 account to invest in stocks and ETFs to build a long-term portfolio and a passive stream of income through dividend investing!
✔️ Open a Trade.MT4 or Trade.MT5 accounts to trade contracts for differences (CFDs) on stocks, indices, commodities and currencies.
✔️ Access real-time, actionable investing ideas through the Premium Analytics Technical Insight Lookup indicator.
Did you know that you can test ALL of these features by opening a FREE demo trading account?
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*Spread Betting is only available for accounts opened with Admiral Markets UK Ltd which is authorised and regulated by the UK Financial Conduct Authority.
About Admirals
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Charts for financial instruments in this article are for illustrative purposes. Past performance is not necessarily an indication of future performance.
Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
