Spread Betting vs CFDs: The Differences

This article aims to show the differences between spread betting and CFD trading. This information will help many traders identify which of the two markets they should be trading.

Spread Betting and CFD Trading

Spread betting and CFD trading are both speculative ways of trading the financial markets. They do not require the trader to own the underlying asset, and they are usually traded on a leveraged basis. They also share similar asset profiles; it is possible to trade stocks, indices and commodities either as spread bets or on the basis of CFD trading. Spread betting is especially popular in the UK, while CFD trading has a global spread. However, there are inherent differences in the two markets, and these differences are highlighted below.

The Differences Between Spread Betting and CFD Trading

Differences in spread betting and CFD trading exist in the following metrics:

  • Payable taxes
  • Location of brokers
  • Trading mechanics
  • Market access and trade execution methodology.

These will now be explained in tabular form.

Spread Betting

Payable Taxes

Spread betting is not only free of payment of stamp duty charge, it also does not attract any form of capital gains tax.

However, it is not possible to use any spread bet losses to offset tax liabilities on future earnings.

Location of Brokers

Spread betting brokers are located in the UK and Ireland only.

Trading Mechanics

Spread bets are usually in the upwards or downwards direction. Some spread betting companies, however, involve market speculation on a wider range of possible outcomes.

Furthermore, trade sizes are calculated by selection of the amount to be bet per point of movement of the asset. In other words, trade sizes are expressed as £/point.

Trade Executions

There is no direct market access; trade orders are executed in-house within a broker’s dealing desk.

CFD Trading

Payable Taxes

CFD Trading is not exempt from payment of capital gains tax on profits made from trading activity.

It is possible, however, to use the losses sustained in trading activity to offset tax obligations on future earnings.

Location of Brokers

CFD brokers are found in many countries around the world (the USA excluded).

Trading Mechanics

CFD trading involves market speculation that is based solely on the extent of price movement for/against the trader’s position.

Furthermore, trade sizes are expressed in terms of the number of units of the asset to be traded, or the number of contracts of the asset to be traded.

Trade Executions

CFDs on currencies and stocks can be traded with direct market access, with pricing and trade executions provided directly from the interbank market.

Do I need to be located in the UK to enjoy spread betting?

A large percentage of those who engage in spread betting is based in the United Kingdom and Ireland. However, this does not mean that those who live in Europe or Asia cannot open spread betting accounts. There are two issues that those trading from outside the UK/Ireland have to contend with. These are:

  • a) The tax situations in the individual countries
  • b) Brexit

Tax laws in the UK and Europe are not uniform and many countries do not have tax laws that allow exemptions from any trading activity, be it spread betting or CFD trading. Another even more concerning factor will be the impact of the impending Brexit. It is uncertain if European traders who engage in spread betting and CFD trading will still enjoy the same benefits that are available to UK/Ireland-based traders post-Brexit. But for now, these are the main differences between spread betting and CFD trading.



Michael
Author: Michael
Hi, I'm Michael and my area of expertise is forex and cryptocurrency trading. I specialize in technical analysis, namely in chart pattern setups. I educate traders of all levels and I believe that prerequisite to successful active trading is always knowing risks of the game. My most current interest lays in cryptocurrencies, especially in Ethereum and in decentralized applications. I do not give investment advice, but for general inquiries please use the comment section under any article.

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