CFDs vs Spread Betting

Although CFDs are frequently the ideal tool for active traders, spread betting, which is available to traders in the UK and Ireland, may be more tax-efficient. I'll outline the main distinctions between CFDs and spread betting so you can choose the derivative that best suits your trading needs.

What are CFDs? 

A CFD (contract for difference) is a leveraged derivative instrument that enables customers to trade with their broker on changes in the price of the underlying asset without actually owning it. Since they never acquire ownership of assets, traders continue to be exposed to corporate actions on shares, such as dividend payments and stock splits, but they are exempt from paying shares stamp duty tax. Due to the fact that CFDs are not offered in the US, where futures and options brokers are the main means by which traders can short an instrument, CFDs have become the derivative of choice for non-US traders.

What is Spread Betting?

Since spread betting does not include trading in the traditional sense and is frequently compared to gambling on a binary outcome, most professionals ignore it. Only citizens of the UK and Ireland are permitted to engage in spread betting. It is a leveraged derivative contract that enables traders to wager money per point on the way the share price will go. Spread betting is a great product for day traders because it is free of capital gains tax in the UK (unless you are categorised as a full-time trading business).

CFDs vs Spread Betting Comparison

Traders in the UK and Ireland who have access to both should check the below table to understand the differences and how they may benefit most from either approach before deciding whether to use CFDs or spread betting.

 

Pros and Cons of CFD Trading and Spread Betting

Despite their similarities in basic concepts, spread betting and CFD trading each have advantages and disadvantages. Before determining which leveraged derivative contract best fits their trading style, traders should do an evaluation.

The benefits of spread betting and CFD trading:

The drawbacks of spread betting and CFD trading:

 

Who Should Trade CFDs? 

Trading CFDs is the best option for investors looking for a similar experience to buying and selling shares in person, but without having to give up ownership of the underlying asset and still getting to take advantage of shareholder benefits like dividend payments.

 

Spread betting against CFD trading will be advantageous for investors who want to hedge their physical shares, use leverage, get DMA access, need corporate accounts, or take advantage of tax-deductible losses.

 

Who Should Use Spread Betting Instead of CFD Trading? 

Spread betting is normally a better option for traders who want to trade foreign assets using their home currency, which is commonly the British Pound for traders based in the UK and the Euro for traders based in Ireland. Spread betting has a big benefit over CFD trading because it is tax-free. It is also commission-free but frequently has wider spreads. As a spreadbettor can wager a set amount, known as the stake, per point, spread betting also provides greater transparency over price action swings.

CFDs vs Spread Betting Example 

Here is an illustration of how CFD trading and spread betting operate from the viewpoint of a trader.

CFD trading illustration

• Consider a trader who purchased 100 CFDs in Company XYZ at 50 and sold them at 52. This would be equivalent to purchasing 100 actual shares.
• The profit is equal to 200 (100 multiplied by the distance between the trade's entry and exit points).
• A decrease from 50 to 48 would cost 200.

Spread betting illustration

• Consider a spread bet on Company XYZ that was placed with a stake of 100 per point, and the price moved from 50 to 52.
• 200 is the profit, matching the CFD deal, but it is a commission- and tax-free profit.
• Similar to the CFD, a move from 50 to 48 would result in a 200 loss.