Spread Betting vs CFD Trading Guide 2024

Spread betting and contracts for differences (CFDs) are innovative financial products that allow traders to control a larger position using a smaller deposit. While both products offer this leverage effect on your capital, they have some differences.

Key Takeaways

• CFDs, or contracts for difference, allow speculators to trade contracts based on the price of an underlying financial market known as financial derivative contracts.
• Spread betting allows speculators to bet on the price movement of an underlying financial market.
• Both spread betting and CFD trading involve the use of leverage allowing you to control a larger position using a small deposit and involve no ownership of the underlying asset.
• Spread betting and CFDs can be used on most financial markets such as forex, stocks, indices, commodities, bonds, ETFs and more.
• There are some distinct differences between spread betting vs CFD trading relating to tax, the type of accounts available, how they are priced and more. 
• Leverage trading magnifies both profits and losses.

What is CFD

A CFD, or contract for difference, is a derivative contract based on the price of an underlying market. The contract represents an agreement to exchange the difference in the value of an asset between the price of the contract when it was first opened and the price of the contract when it was closed. 

One of the main reasons CFDs are popular is that you can trade on leverage. This means you can open a larger position using a small deposit. For example, it is common for most brokers to offer up to 1:30 leverage on forex pairs. This means you can open a £30,000 position on a currency pair with only £1,000. 

The rest of the trade value is borrowed from the broker. As you borrow money from the broker, if you hold a trade overnight (past 10 pm UK time), there is a financing fee which is known as the swap fee, or rollover fee. It is based on the two different interest rates of the currencies you are trading. In some cases, you will pay the swap fee and in other cases, you may be credited the fee.

CFD Trading Example 

A trader believes Apple shares will rise and buys 10 Apple CFDs at the market price of $350 each.

A traditional investor will need to pay $3,500 for the shares (10 * $350). With a CFD trading account, you can purchase Apple shares with 1:20 leverage, or a 5% margin (1/20 * 100 = 5%). This means you only need to put up $175 to buy 10 Apple CFDs worth $3,500.

However, the swap fee is -0.02% for each day you hold a trade overnight. If the fee stays the same each day this means it would cost you $0.70 cents per day to roll over this position ($3,500 * 0.02%). For day trading strategies in which traders close a trade at the end of the day, there are no rollover fees. If you are a very long-term investor planning to hold a trade as an investment for several quarters or years, then you may consider purchasing real shares. 

If the trader exits the trade when Apple reaches $400 it will result in a profit of $500 ($400 - $350 * 10 shares), minus any costs. If a trader exits the trade at $300 it will result in a loss of -$500.00 ($350 - $400 * 10 shares), plus any costs.

Benefits of CFDs: 

• Trade long and short and potentially profit from rising and falling prices.
• Trade on leverage enabling you to control a larger position using a smaller deposit.
• Receive a positive rollover fee on some forex pairs (depending on the interest rates at the time).
• Trade CFDs on multiple asset classes.
• Use CFDs for hedging strategies to offset losses in another portfolio. 
• Access interbank market pricing on forex pairs. 
• Offset any losses in the next tax year. 
• Open an individual or corporate account. 

Risks of CFDs: 

• Lose more than your deposit as leverage magnifies profits and losses. 
• As with any form of investing you can be wrong on the direction of the market, resulting in a loss.
• Negative rollover fee can lead to large holding costs. The rollover swap fees can be high depending on the current interest rate which can eat into profits. 
• Margin trading can lead to taking too many positions resulting in overexposure and a significant loss.

What is Spread Betting

Spread betting involves betting on the price movement of an underlying market without ever owning it. It is a form of derivative trading in which speculators bet on the price direction of a market using a certain bet size per point a market moves.

As with CFDs, spread betting enables you to trade long and short a market using leverage (typically the same margin requirements for CFDs) and on multiple asset classes. Let's look at an example.

Spread Betting Example 

A trader opens a £10 per point buy (long) bet on Tesla shares at $250. This provides an exposure of $2,500 but with 1:20 leverage (or 5% margin), the trader only needs $125 to open the position. The rollover, or swap fee is -0.02% resulting in a £0.50 pence fee to hold the position overnight.

The trader exits the stock at $300, resulting in a 10-point gain and £100 profit ($300 - $250 * 10), minus any costs. If the trader exits at $200 this results in a 10-point loss and a £100 monetary loss ($250 - $200 * 10), plus any costs.

Benefits of Spread Betting: 

• Potentially profit from rising and falling prices by trading long and short.
• Utilise leverage to control bigger positions using a small deposit.
• Spread bet on multiple asset classes for portfolio diversification. 
• Potential tax-free gains for UK and Ireland residents.

Risks of Spread Betting: 

• Lose more than you invest. As the margin is based on the full exposure of a position, the initial margin may not cover the value of the position if it rises. 
• You will inevitably be wrong on some trades resulting in a loss of capital.
• Rollover and swap fees can eat into any profits if you hold trades for too long.
• You cannot offset any losses into a new tax year or use a corporate account.

Comparison of CFD and Spread Betting

What is Similar Between Spread Betting and CFD Trading

Some of the main similarities between spread betting vs CFD trading include: 

• Trade long and short 
• Same leverage for retail clients 
• Access multiple asset classes 
• Trade with zero commission (depending on the CFD account opened) 
• Swap fees (if holding trades overnight) 
• Trade the same market times 

What are the Differences Between Spread Betting and CFD Trading 

Here are some of the main differences between spread betting and CFDs: 

• Spread betting accounts only available to UK and Ireland residents 
• For UK residents spread betting is free from stamp duty and capital gains tax, whereas with CFD trading you may need to pay capital gains tax 
• CFD traders can offset any losses for the next tax year which spread bettors cannot 
• Access lower spreads through different types of CFD accounts which provide access to the interbank market

Pros and Cons of CFD and Spread Betting 

Here are some pros and cons to take into consideration when deciding to use CFD or spread betting trading accounts.

Spread Betting Advantages 

• Trade long and short to potentially profit from rising and falling markets 
• Use leverage to control a larger position using a smaller deposit 
• Potentially tax-free profits depending on your region and individual circumstances 
• Commission-free trading and low bet sizes for small accounts 

Spread Betting Disadvantages 

• Leverage also amplifies losses so you can lose more than you deposit 
• If the market gaps beyond your stop loss, you will incur slippage and lose more than your initial risk 
• Cannot offset any losses
• As with any form of trading, it involves winning and losing which can take a mental toll on many

CFD Advantages 

• Potentially profit from rising and falling markets by trading long and short 
• Trade on margins to leverage your trades to control a larger position using a smaller deposit 
• Commission-free trading accounts available 
• Can access interbank market pricing for low spreads via CFD ECN accounts 
• Offset any losses into a new tax year 

CFD Disadvantages 

• Leverage also magnifies losses so you could lose more than your deposit 
• If the market gaps through your stop loss, you may lose more than initially risked on the trade
• Risk management calculations are more complicated as pip values change 
• As with any form of trading, it involves winning and losing which can take a mental toll on many

Who Should Use CFD and Spread Betting 

Deciding whether to use a spread betting or CFD trading account will depend on your individual circumstances. You should first consider if you are able to handle the mental toll of losing money. You should only trade with capital you can afford to lose. Beyond this, the most obvious consideration is where you are located as only those in the UK and Ireland can use a spread betting account. As there are some tax advantages to using spread betting accounts for some individuals then this should also be a consideration in your choice.

If you are a very short-term trader who employs day trading strategies, then a CFD account may be more useful. This is because brokers such as Admirals offer ECN-style pricing on the Zero.MT4/MT5 account types which means you can access lower spreads directly from the interbank market. Lower spreads are essential for day traders who try to trade short-term moves in the market.

A longer-term investor may see some advantages in a CFD trading account as you can offset any losses into a new tax year. This can be useful for investors looking to hedge a current stock portfolio. In fact, CFDs were originally designed by two investment bankers to short a stock index in the hope any gains may offset the losses in a declining stock portfolio - which is very challenging to achieve.

There are traders and investors who will use both spread betting and CFD trading accounts to manage different styles of trading. It doesn't have to be one or the other. Identifying your style of trading or investing first, can you help you to make a more informed decision on whether CFD vs spread betting trading accounts are more suitable for you. 

Conclusion 

Both spread betting and CFDs allow investors to trade long and short using leverage on multiple asset classes. One of the main differences between CFD and spread betting is how they are treated for tax purposes and the ability to offset any losses into a new tax year.

Choosing the most suitable account for your own needs depends on your individual circumstances and trading goals. For example, the Admirals Zero.MT5 CFD account offers ECN-style pricing, resulting in lower spreads from the interbank market and charges a commission per trade. 

Continue Reading:

• What is Spread Betting & How Does it Work? 
• The CFD Trading Guide: How to Trade CFDs Explained 
• Trading Risk Management
• 6 Strategies to Trade This Year 

FAQs on Spread Betting and CFD Trading

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.