On the surface, contracts for difference (CFDs) and spread betting can appear quite similar. You won’t have to pay stamp duty on your profits with either, and both allow for leveraged trading on long or short positions on a variety of markets.
Look closer, though, and there are some key differences in how they work, as well as some advantages that are unique to each.
First up is opening a position, and setting your deal size:
- When spread betting, you are betting an amount of money for every point of movement in an asset’s price.
- With CFDs, you are buying or selling a contract that is equal to a certain amount of money per point in the underlying market.
One of our FTSE 100 CFD contracts, for example, are the equivalent of spread betting at £10 per point. If you bought a single FTSE 100 CFD, then you’d make £10 for every point its price increases.
Spread betting is currently tax free in the UK, meaning you won’t have to pay any capital gains tax (CGT) on your profits1. CFDs are liable for CGT, but when trading CFDs you are able to offset any losses against future profits for tax purposes. This means that CFDs can be very useful for hedging.
Spread bets tend to have a fixed expiry date attached to them. They can expire at the end of the day, or in several months’ time. CFDs, on the other hand, usually have no expiry date attached.
Direct market access, or DMA, allows you to interact with the order books of forex providers2 or stock exchanges. It is currently available when trading shares or forex via CFDs, but not when spread betting.
Trading with shares
You don’t have to pay commission on trades when spread betting, as the charges to open your position are included in the spread. This is true with most CFDs as well, but if you are opening a share CFD you’ll have to pay commission at the outset.