Spread Betting vs CFDs: What are the Differences?

What is Spread Betting and How Does it Work?

Spread betting is possible on a range of different financial assets, including stocks, indices, commodities, currencies, forex, and more.

Spread betting is a financial derivative that allows investors to speculate on the price movements of various financial instruments without undertaking any of the risks or burdens of actual ownership.

You can place a spread bet on a wide range of different financial assets, including traditional stocks and commodities but also indices, forex, and more. With a spread bet, you are, in essence, taking a bet on whether the price is going to rise or fall.

In the UK, spread betting has become extremely popular with a wide range of investors, and it’s easy to see why.

Pros:

• Spread betting offers traders massive upside thanks to the ability to leverage a position, whereby you can open a full position at just a fraction of the cost.
• Spread betting lets you profit, regardless of market conditions. Your bet is on whether the price of the underlying asset is going to rise or fall; as long as your “bet” is correct, you profit.
• Spread betting is possible on a wide range of markets. Regardless of your expertise, you are sure to find a market that suits you.
• Spread betting is a great tax-efficient investment opportunity in the UK, as it is exempt from capital gains tax and stamp duty.

Cons:

• Spread betting is a high-risk investment vehicle, and if you are not careful, your leveraged position can also leverage your potential losses.
• Spread betting is known for its extremely fast paced nature; spread bets are positions that can change in an instant.
• With a spread bet, you do not own the underlying asset; as such, you are limited and do not have a right to any of the entitlements of the asset, for example, dividends.
• Spread betting is extremely fast-paced, and to be honest with you, it is not suitable for all traders. If you have the time and energy needed to focus on spread bets then it can be a great choice, but its not suited for everyone

How to start spread betting

So now that I have explained how spread betting works and taken a look at some of the pros and cons, you may be wondering how to start placing spread bets.

If you are certain that the fast pace and strong upside offered by spread betting are something you want to try out yourself, then read my 7-step guide to spread betting and find out how.

Step 1. Set out your strategy

Before you start placing spread bets, and indeed before any major financial decision, you should set out your goals, limits, and strategy. This is even more important when spread betting, as you will need to be fairly active and have a strategy in place from the get-go.

Step 2. Find a spread betting provider

There are many brokers out there that let customers place spread bets; some are better than others, and some will be more aligned with your trading strategy. For this reason, I advise you to look around before opening an account with a spread betting company and check the following:

• Confirm they are regulated by the Financial Conduct Authority (FCA).
• Check that client funds are kept separate from the broker’s operational funds.
• Compare the pricing model and fees they charge.
• Read broker reviews, many unbiased reviews are available online.

Step 3. Open an account

Once you have found a broker that checks all your boxes, you will need to sign up. Before you can start trading, however, your broker will ask you for some personal and financial information.

Be aware that as part of their legal requirements, the broker will have to verify your identity, and for this reason, you will also have to provide a personal ID and possibly proof of address. Once you have supplied this information, the broker will verify your data, and assuming everything goes smoothly, you should be able to add funds to your account and start trading.

Step 4: Choose a market to bet on

Spread betting is available in a lot of different markets, each with its own characteristics and, of course, risks! The most common ones are;

Stock indices such as the FTSE, but also the S&P 500, FTSE 100, Dow Jones Industrial Average, or DAX, can be attractive markets for spread betting.

Forex’s high liquidity and volatility make it almost tailor-made for spread betting.

The price fluctuations experienced by commodities such as gold, silver, crude oil, natural gas, or agricultural products make them a popular choice with a lot of spreadbetters.

Traditional stocks are a great choice for you to bet on if you are knowledgeable about the particular sector in question and are confident you can predict likely developments.

Lastly, some spread betting providers provide cryptocurrencies, such as Bitcoin and Ethereum. Crypto, similar to Forex, is extremely volatile, but I should warn you that recent developments have made crypto an even riskier proposition than before. It is worth noting that under FCA rules, only professional traders are permitted to trade cryptocurrencies using derivatives like spread bets.

Step 5: Decide on direction

So, you have selected an asset now. The big question is: in what direction do you think the price will move? If you think it will rise, you take a “long” position (buy); if, on the other hand, you suspect that it will fall, you take a “short” position (sell).

Once you have decided what position you will take, you simply need to place a bet per point of movement in the asset price. For example, let’s say you bet £10 per point that the price will move in your favour. You will make a profit of £10 per point that it moves in your favour. If, however, it moves against you, you will lose £10 per point.

Step 6: Set your stops and limits

Setting stops and limits is essential to successfully managing the risky business of spread betting. With stops and limits in place, which you can quickly assign before closing your bet, you are setting levels at which your position will automatically close to limit potential losses (stop loss) or secure profits (take profit).

Stops and limits are vital tools in helping you minimise potential losses and secure your profits before markets change against you.

Step 7: Monitor and close your trade

I hope my guide has made it clear that spread betting is fast-paced and positions can change in minutes. For that reason, it’s important that you are actively monitoring your position and the price movements of the underlying asset in order to successfully close your position and leave with a profit.

What Are CFDs and How Do They Work?

CFDs, or contracts for difference, are financial derivatives that allow traders to speculate on the price movements of various underlying assets without actually owning the assets themselves. CFDs are similar to spread bets in that they provide an opportunity to profit from both upward and downward price movements without actually taking ownership of the asset in question. For a more detailed look at CFDs, check out my article on how to trade CFDs.

Spread betting vs CFDs: key differences

There are a lot of similarities between trading CFDs and spread betting, as both profit on changes in the market price and let traders and investors profit regardless of the actual conditions in the underlying market.

CFDs and spread betting allow traders to speculate on the price movements of various financial markets. While they share some similarities, there are key differences between the two:

Tax

The biggest and most significant difference between spread betting and CFDs is the tax treatment. Under UK tax law, spread betting is considered a form of gambling, and as such, you do not pay tax on any profits you make. This is in contrast to CFD trading, where your profits may be subject to capital gains tax.

Trading Structure

Another key difference between the two is the fact that when placing a spread bet, you are betting on the movement of the underlying asset prices on a price per point basis, aka a “pip”. Meanwhile, if you trade CFDs, you are doing so for a defined contract size, whereby each CFD contract may represent one share of the stock.

Availability

Financial spread betting is only possible in the UK and the Republic of Ireland. Outside of the British Isles, it is unregulated and unavailable; instead, you would have to use similar trading instruments such as CFDs, options, and futures, which are commonly available outside of the UK.

Pricing

CFDs, as a more conventional financial product, will typically include a commission or trading fee in addition to a spread fee. Meanwhile, on a spread bet, the costs are built into the spread, which is the difference between the buying and selling prices and is usually the only fee associated with spread betting.

Trading Hours

CFD trading generally follows the trading hours of the underlying market, and very rarely can traders extend their position beyond the market’s close. Spread betting, on the other hand, allows for trading 24 hours a day, even when the underlying market is closed.

Markets

CFDs are available in a wide range of markets, including stocks, indices, commodities, currencies, and bonds. In contrast to spread betting, which is generally available only for products associated with financial markets, e.g., stocks, indices, currencies, and commodities.

These are just a few examples of the differences between the two, but CFD trading and spread betting are quite similar in that both require you to take betting positions, whether long or short, in order to profit from market moves.

Advantages Of CFDs vs Spread Betting

As you can see, there are a lot of similarities between the two, and I would recommend either option to active traders, as both CFDs and spread betting are extremely robust tools for wealth generation. Assuming your spread betting or CFD positions are correct and the price movement matches your position,

But while there are a lot of similarities, there are also some differences that make spread betting a better option:

For tax purposes, many investors have opened spread betting accounts, as in the UK you do not pay capital gains tax on a spread betting account and your profits are, under UK tax laws, tax-free. This makes a remarkably tax-efficient investment vehicle, as the range of tax-free investment opportunities in the UK is somewhat limited.

Spread betting is an incredibly flexible investment vehicle. With a spread bet, you are betting on how the price of the underlying asset in question will move, similar to a CFD. However, unlike a CFD, which is on a fixed contract basis, a spread bet is paid out per point of price movement in the underlying asset. This means the earning potential is far greater, as your payout is only limited by how many points the price of the asset in question moved in line with your bet.

Lastly, with spread betting, you will be using a commission-free trading tool. Typically, spread betting providers do so without charging customers commissions or brokerage fees. Instead, the cost of trading is built into the spread, the difference between the buying and selling prices of the asset.

Direct market access

For CFD traders, another advantage is direct market access (DMA). With DMA, you can access the markets directly and without middlemen, providing you with complete control over trades. Since traders can quickly execute orders and suffer less latency, trading CFDs becomes more transparent and efficient.

Additionally, DMA gives traders access to large liquidity pools, enhancing your chances of locking in good deals. And even though spread betting positions can also make use of DMA to take advantage of narrower spreads, the benefits are less pronounced.

So in conclusion, many traders may decide that the appeal of a tax-free investment opportunity is simply too great to turn down. But even if you do not mind paying capital gains tax on earnings, the flexibility and lower trading fees of spread betting are also worth taking into account when considering spread betting.

Spread Betting vs CFDs FAQs

Please note

Spread betting, CFDs, and forex trading carry risk and are complex instruments that may not be suitable for all investors. This article is for informational purposes only and does not constitute financial advice. All contents are based on my understanding of HMRC legislation, which is subject to change. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.