Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

How spread betting and CFD trading work

Lesson 7 of 7

How CFDs differ from spread betting

So far we've emphasised that CFD trading closely resembles spread betting. However, although these two derivatives products are very similar in many ways, there are some key differences to be aware of.

Deal size

As mentioned earlier in this course, when spread betting, you bet an amount of money per point on whether a market will go up or down. For instance, you might bet £5 per point that the price of the FTSE 100 will fall. With CFDs you buy and sell contracts that represent a specified amount in the underlying market. For example one standard FTSE contract might be worth £10 per point.

Capital gains tax

Spread betting profits are currently free from capital gains tax, but CFDs are liable because they are classed as a financial instrument. This may seem a major drawback, but any losses can be offset against future profits for tax purposes, which makes CFDs good for hedging (see below).

Note that stamp duty on share trades doesn't apply to either spread betting or CFDs, as you never own the underlying shares in either case. (Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.)

Did you know?

What is hedging?

If you have an asset in an existing portfolio that you believe may lose some of its value, you could use a CFD to offset the loss by short selling. For example, let's say you hold £1000 worth of HSBC shares in your portfolio. You can short sell the equivalent of £1000 worth of HSBC shares through a CFD trade. Should HSBC's share price fall in the underlying market, the loss in value of your share portfolio would be offset by a gain in your short CFD trade.

Expiry times

Spread bets tend to have fixed time limits - anything from minutes to several years - when they'll naturally expire if you haven't already closed them. Most CFD trades, on the other hand, will stay open indefinitely (although there are a few exceptions, such as futures and forwards). When you want to close out a position you simply place a trade in the opposite direction to which you opened it.

Commission charges on shares

When you place a spread bet you are rarely charged commission - most providers' charges are included in the spread. The majority of CFD trades are the same, though in the case of shares many CFD providers match the price of the underlying market, then charge commission for carrying out the trade. This mimics the mechanics of trading shares in the underlying market.

Example

Let's say you think shares in Sports Company N are set to rise. You could take a position with either a CFD or a spread bet.
 
CFD
 
The shares are currently listed at a price of 1545/1547 in the underlying market (the equivalent of £15.45/£15.47). You decide to 'buy' 1000 shares as a CFD. Your provider offers the shares at market price, but charges 0.1% commission on the full value of the position. So the final charge would be calculated as 1000 x £15.47 x 0.1% = £15.47
 
Note that although you only have to put down an initial margin deposit to open the position, the commission charge is based on its full value in the underlying market.
 
Spread bet
 
You want to bet £10 per point on the price of Sports Company N to rise. Your provider doesn't charge commission but the spread incorporates a 0.1% charge, so instead of being offered at 1545/1547, the bid price now stands at 1543.45 (1545 - (1545 x 0.1%)) and the offer price is 1548.55 (1547 + (1547 x 0.1%)). You won't be charged commission on the purchase, but you've had to buy at a higher price than if you were trading CFDs.

Question

Which of the following statements apply to CFD trading rather than spread betting? Select all that apply:
  • You stake an amount of money per point on whether a market will go up or down
  • There's no stamp duty, but you do pay capital gains tax
  • Losses can be offset against future profits for tax purposes
  • There's normally no commission to pay on shares
  • It's an effective way of hedging an existing portfolio

Correct

Incorrect

Spread betting and CFD trading work in broadly similar ways, but there are technical variations and, importantly, different taxation and charging mechanisms apply.
Reveal answer

Lesson summary

  • Trading CFDs closely resembles spread betting, but there are some key differences
  • Spread bets are made in an amount of money per point, CFDs are traded in standardised contracts
  • Profits made from spread betting are currently free from capital gains tax, but CFDs are liable
  • Spread bets generally expire at a fixed time if you don't close them first, while in most cases CFDs will remain open indefinitely
  • Traders are generally charged commission to conduct share CFD deals, while the charges for spread betting on shares are usually included in the spread
Lesson complete