How spread betting and CFD trading work
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.
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?
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.
IncorrectSpread betting and CFD trading work in broadly similar ways, but there are technical variations and, importantly, different taxation and charging mechanisms apply.
- 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