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Among the most popular ways to trade shares, forex, commodities, and more, spread betting and CFDs are two of the most popular trade methods. Even though these two types of trading share a lot in common, you also need to be aware of some important differences.
Throughout this guide, we will explain how spread betting vs. CFD trading works and help you decide which one is ideal for you.
75.26% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Here is a quick look at some of the key differences between spread betting and CFD trading:
Profits from spread betting are tax-free; profits from CFD trading are taxed at the capital gains rate.
Commissions and fees may apply to spread betting and CFD trading, while the former is commission-free.
Spread bets have set expiration dates, whereas CFD contracts can be held indefinitely.
The spread bets are placed over the counter while the CFDs are traded in the market itself.
If you are placing spread bets, you can use any currency; however, if you are placing CFD trades, you must use the currency of the underlying asset.
Spread Betting vs. CFD Trading Comparison
Apart from the obvious differences, spread betting and CFD (contract for difference) trading share many similarities. Here is how CFDs and spread betting stack up against each other:
Spread Betting
CFD Trading
Tax Implications
You pay no capital gains tax or stamp duty. However, a loss from one financial instrument cannot be offset by a gain from another.
Profits are taxed as capital gains. As a result, losses can offset gains from CFD trading. Not subject to stamp duty.
Commissions & Fees
None.
May charge commissions or holding fees. Many CFD brokers offer commission-free trading.
Spreads
Must pay a spread when trading.
Must pay a spread when trading.
Rising or Falling Markets
You can profit in either direction by going long or short.
You can profit in either direction by going long or short.
Leverage
Leveraged products; margin varies by an asset.
Leveraged products; margin varies by asset.
Expiration Date
It is possible to close the contract anytime before its expiration date.
There is no expiration date. Both long and short positions can be closed at any time.
Direct Market Access
I traded over the counter with a broker. Unfortunately, you cannot transfer spread bets.
Direct market access. CFDs are transferable between CFD traders.
Profit Calculation
Profit or loss equals the difference between opening and closing price, multiplied by your investment amount.
Profit or loss equals the difference between opening and closing price, multiplied by your investment amount.
How CFD Trading and Spread Betting Work
Spread betting and contract for difference trading are two types of derivative products that may be used to speculate on the price movement of underlying assets. It is possible to use shares, ETFs, forex, commodities, indices, and more as the underlying asset whenever you deal with derivatives; it is important to keep in mind that none give you ownership rights over their underlying assets.
It is possible to take a long or a short position when trading CFDs or spread betting. It means that you can make money by either betting on the price of an asset to rise (long position) or bet on the price to fall (short position). To compute your profit or loss, subtract the asset price when you closed the trade from the price of the asset when you opened it, then multiply that amount by the amount of money you invested.
Additionally, if you choose to use CFDs or spread betting, you will have the ability to leverage your trades. There are different maximum leverages for different assets, and the maximum leverage for each asset is decided by your broker based on the risk involved. If you are trading CFDs or spread betting, you may or may not customize the margin that you use. That is dependent on the broker you are using.
It is important to remember that there can be nuanced differences between spread betting and CFD trading even within those broad strokes.
How Does CFD Trading Work?
If you are trading CFDs, you open a contract with your CFD provider or broker. To open or close the contract, you might have to pay a commission, and if you hold the position overnight, then there may also be a swap fee that increases the cost of the position.
A very important aspect of CFD contracts is that they can be transferred between traders. Therefore, they are traded on the open market, and many brokers provide direct market access to their clients. Consequently, this increases transparency in the CFD market and increases the value of fast trade execution speeds.
How Does Spread Betting Work?
Similar to CFD trading, spread betting involves opening a position with a broker. However, a spread bet is never subject to a commission.
Spread bets cannot be transferred between traders, so they must be traded directly with your brokerage. Furthermore, spread bets expire after a certain period. If the bet has not already been closed, it can be closed at any time before the expiration date. If the bet has not yet been closed, it will automatically close.
Spread Betting vs. CFD – Tax
There is one major difference between spread betting and CFD trading, and that is how profits from these two types of derivatives are taxed.
Despite being regulated by the FSA in the UK, the US consider spread betting to be internet gambling which is forbidden. It is also worth noting that all income in the USA is taxable (including gambling winnings).
To take an example. In the UK and Ireland, stamp duty is not payable in either of these transactions because the trader never owns the underlying asset. On the other hand, CFD trading is subject to capital gains tax (CGT), whereas spread betting is not.
Having said that, if you make a profit from CFD trading, you will be responsible for paying capital gains tax on those profits. However, you can use losses from CFD trades that you suffer from offsetting profits from other CFD trades or trades with other financial instruments. For example, there is no tax on profits from spread betting, but the losses from spread betting cannot be used to offset profits from CFD trading or other types of investments.
Spread Betting vs CFD – Fees
One of how CFDs differ from spread betting is the fees you have to pay to trade them. Spread bets do not have to pay commissions when you trade CFDs, while you might have to pay a transaction fee if you trade CFDs. One good news is that many CFD providers now offer commission-free trading to their clients.
Either you will have to pay a spread if you are trading CFDs or spread betting. That is the difference between the bid and the price of the underlying asset you are trading around. Spreads vary from one asset to another based on the liquidity of the market and the type of asset.
It is important to remember that you must purchase CFDs in the currency corresponding to the forex pair you intend to trade when using CFDs to trade forex. If you trade forex pairs in a currency other than GBP or USD, your broker may charge you a currency conversion fee.
It is possible to open spread bets on forex pairs in any currency, so you do not have to worry about dealing with currency exchange fees when opening spread bets.
Spread Betting vs CFD – Expiry Dates
Furthermore, CFDs differ from spread bets in terms of their expiration dates.
There is no expiration date associated with CFD contracts. As a general rule, contracts are set up for one month at a time, but your broker will automatically convert your position into a new one before the old one expires. So if your position is losing money, you can keep it open for as long as you want (even if you have to pay holding fees and even if you have to pay higher margin requirements).
Conversely, spread bets have a defined expiration date, whereas futures bets do not. In general, there are two types of spread bets: those that expire at the end of the trading day and those that expire every quarter. If your broker allows you to roll over a spread bet into a new contract, you may be able to do so, depending on the broker. In any case, it is important to remember that if you do not roll your contract over when your contract expires, your bet will automatically expire as well.
Spread Betting vs CFD – Regulation
There are two types of spread betting and CFD trading regulated by the Financial Conduct Authority (FCA). It is responsible for setting rules that govern how brokers can issue leveraged financial products to retail investors, and it is the UK’s primary financial watchdog.
It is important to remember that spread betting is only allowed in the United Kingdom and Ireland if you are based out of the United States and looking for tax-efficient trading tools, you might want to consider a spread betting platform. Keep in mind that spread betting is illegal in the United States at the moment, so this might be something you ought to take into consideration. Because of this, US residents cannot open spread betting accounts with most spread betting companies in the UK; however, they can trade Contract for Difference (CFDs).
On the other hand, CFD trading can be done worldwide. Therefore, all brokers offering spread betting are regulated by the Financial Conduct Authority (FCA). However, foreign authorities may regulate some brokers that offer CFD trading, such as the Cyprus Securities and Exchange Commission (CySEC).
There is one important thing that investors need to be aware of, and that is the fact that you cannot trade cryptocurrencies through CFDs or spread betting. According to the FCA, cryptocurrency derivatives, such as CFDs and spread betting, are now banned.
Pros & Cons of Spread Betting and CFD Trading
Investing in spread betting and CFD trading has advantages and disadvantages relevant to both.
Spread Betting
Pros:
There are no commissions or transaction fees
Forex bets do not incur currency conversion fees
Capital gains are not taxed
Speculate on rising and falling markets
The underlying market determines prices
Many brokers offer 24-hour trading
Cons:
The counter dealing is not completely transparent
Expiration dates every day or every quarter
Available only in the UK and Ireland
It is not possible to offset losses with profits from other trades
CFD Trading
Pros:
Access to direct markets increases transparency
There is no expiration date
For capital gains tax purposes, offset profits with losses
Worldwide availability
Markets can rise or fall based on speculation
Based on underlying market prices
Many brokers offer 24-hour trading
Cons:
Commissions and fees associated with trading
Fees associated with the currency conversion in forex trading
Profits must be taxed as capital gains
Best Spread Betting Platforms
Do you want to start trading using spread betting? Here is a closer look at two of the most popular spread betting platforms available on the market today:
2. Pepperstone – Spread Bet with MT4, MT5, and cTrader
The Pepperstone Spread Betting Broker is a comprehensive spread betting broker perfect for beginners and seasoned traders. It is worth noting that the broker sets itself apart from its competitors by offering a variety of trading platforms. These include MetaTrader 4, MetaTrader 5, and cTrader.
All three platforms make it possible for you to create your custom technical indicators and backtest strategies so that you can analyze your trading strategy in-depth. In addition to these features, the MetaTrader and cTrader platforms are designed to help you manage risk and give you access to advanced order types and other tools for managing your trades.
Furthermore, Pepperstone offers social trading through MetaTrader 4 and Myfxbook in addition to traditional online trading. The social trading platforms you’ll find on these sites can be extremely helpful for connecting with spread bettors and learning new trading strategies, especially if you’re interested in trading forex.
The assets Pepperstone offers is somewhat limited. The broker offers over 180 financial instruments, including more than 60 forex pairs and more than 60 stocks from the United States. It is one of the most affordable spread betting platforms as it offers extremely low spreads and leverage of up to 30:1 on the major forex pairs.
There is no negative balance protection for all accounts with Pepperstone because FCA regulates it. Support can be found via phone, email, or live chat 24 hours a day.
Fee
Amount
Stock trading fee
$0.02 per US stock
Forex trading fee
Spread, 1.59 pips for GBP/USD
Crypto trading fee
Spread, 50 pips for Bitcoin
Inactivity fee
Free
Withdrawal fee
Free
Pros:
Provides support for MetaTrader 4, MetaTrader 5, and cTrader
76.25% of retail investor accounts lose money when trading CFDs with this provider.
Best CFD Trading Platforms
When choosing the best CFD trading platform, you will have many options available to you. If you think CFDs are a good fit for you, there are a lot of choices. Let’s take a look at our top two recommendations:
1. eToro – Best CFD Trading Platform with Shares, Forex, & More
eToro is the best choice for traders looking for a CFD provider. With this broker, you can trade more than 2,000 shares from exchanges worldwide, including in the UK, Australia, the US, Europe, Hong Kong, and South Africa. Furthermore, eToro offers CFDs on more than 40 currency pairs and 25 commodities popular with investors.
It is an advantage for traders looking to keep costs down to know that CFD trading with eToro is 100% commission-free. There is no doubt that the broker’s spreads are in line with the industry average for most assets. There is a small withdrawal and inactivity fee associated with eToro, but these can easily be avoided.
With eToro, you have the choice of both a web-based trading platform and a mobile app. As part of the platform, you will find over 100 technical studies and drawing tools, as well as a market news feed and an economic calendar. Moreover, you can also see whether other traders on eToro are buying or selling an asset, making it easy for you to spot any changes in momentum.
We believe that eToro’s most attractive feature is its social trading platform, where you will find tens of thousands of other CFD traders from all over the world. You can share trading ideas, success stories, and strategies with other traders with this platform. eToro also supports copy trading, so you can copy the portfolios of professional CFD traders and mimic their performance with just a few clicks.
eToro is regulated by the UK’s Financial Conduct Authority (FCA) and is widely acknowledged as trustworthy. In addition, almost all trading accounts are protected by the Financial Services Compensation Scheme for a maximum of 8.5 million pounds. eToro offers 24-hour customer support by phone and email, seven days a week.
Fee
Amount
Stock trading fee
Free
Forex trading fee
Spread, 2.1 pips for GBP/USD
Crypto trading fee
Spread, 0.75% for Bitcoin
Inactivity fee
$10 a month after one year
Withdrawal fee
$5
Pros:
CFDs on over 2,000 global shares
CFD trading without commissions at 100%
A custom trading platform with over 100 indicators
67% of retail investor accounts lose money when trading CFDs with this provider.
2. Libertex – Zero-spread CFD Broker with Advanced Trading Platforms
There are several top CFD trading platforms, and one of them is Libertex. The unique feature of this broker is its low-cost pricing structure, which eliminates spreads from your CFD trades.
Libertex compensates for this by charging small commissions as low as 0.008%, below the average for forex trading in the UK. But, of course, there is nothing better than knowing how much your trade will cost you upfront since the commissions are fixed for each asset.
Despite Libertex’s hand-picked portfolio of assets not being the largest in the market, most traders will find plenty to focus on. This CFD broker offers around 80 of the most popular US stocks, as well as more than 50 currency pairs. Besides stocks, indices, and commodities, you can also trade CFDs on a range of stock indices and commodities with this broker.
There are 2 trading platforms that Libertex offers: its custom Libertex platform and the popular MetaTrader 4 platform. Both platforms can be accessed from a web browser and mobile devices. The thing we like most about Libertex’s custom platform is that it’s flexible and includes a market sentiment gauge to help you track the changes in an asset’s price momentum. Also, it offers a variety of order types for risk management and a market news feed built into the software.
A firm like Libertex is regulated by the Cyprus Securities and Exchange Commission (CYSEC), based in Cyprus. Therefore, customer support is only available by email at Libertex.
[/su_table]
Fee
Amount
Stock trading fee
Free
Forex trading fee
Spread, 2.1 pips for GBP/USD
Crypto trading fee
Spread, 0.75% for Bitcoin
Inactivity fee
$10 a month after one year
Withdrawal fee
$5
[/su_table]
Pros:
CFD trading with zero spreads
Commissions are lower than average for the industry
67% of retail investor accounts lose money when trading CFDs with this provider.
Conclusion
The spread betting and CFD markets are financial derivatives that can speculate on the future price of an asset without actually owning it.
If you choose between spread betting and CFD trading, it is important to understand the differences between the two. Spread betting has the advantage of being free of capital gains tax, unlike CFD trading, which is subject to capital gains tax. On the other hand, CFD trading is also available overseas, and CFD contracts aren’t subject to expiration.
We recommend Pepperstone to those ready to get started with spread betting. However, we recommend eToro as an excellent place to start for those interested in trading CFDs.
67% of retail investor accounts lose money when trading CFDs with this provider.
FAQs
Is spread betting the same as CFD trading?
CFD trading and spread betting both use leveraged derivatives to let you speculate on the price of an underlying asset without actually owning it. Nevertheless, they are different forms of trading, and they have different tax implications and fees associated with them.
Can I trade CFDs commission-free?
eToro, for example, offers 100% commission-free CFDs. In addition, spread betting is always commission-free at brokers that offer it.
Is it possible to choose the amount of leverage for CFDs and spread betting?
Depending on the asset you choose, you may be able to choose how much leverage to use. In addition, your broker may be able to let you adjust the leverage you use.
Direct market access: what is it?
Direct market access means that your trade is passed directly to the market for execution without being reviewed by the broker's in-house trading office first. Consequently, your trade is executed faster and more transparently. However, direct market access is only available for CFD trading, not spread betting.
Is spread betting legal in the US?
Spread betting is currently not legal in the United States. In addition, US citizens generally cannot open spread betting accounts with most spread betting companies in the UK. Still, they may open contracts for difference (or CFD) accounts.
Jhonattan has been writing crypto and stock trading articles on Trading Platforms for 2 years. Before starting his career as a freelance writer, Jhonattan studied at the Universidad La Gran Columbia from which he graduated in 2019. Jhonattan describes himself as a crypto enthusiast and regularly writes price prediction articles for new projects. During his time as a writer, Jhonattan has gained great knowledge about the crypto space and has mastered technical analysis skills that he uses when writing token price predictions. As well as writing for Trading Platforms, Jhonattan has written for Stocksapps.com and Buyshares.co.uk.
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