Spread betting and CFD trading are both forms of derivatives trading but subject to different tax laws (CGT and stamp duty). Read on to find out how spread bets and CFDs work, along with the different financial instruments and brokers available.
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If you are in the United Kingdom (UK), Ireland or Wales, you are able to spread bet and trade CFDs with your retail investor accounts. Traders from other major financial hubs around the world, unfortunately, are not able to spread betting as the countries regulators do not permit this form of betting. Spread betting can be a popular alternative to the more common CFD trading as there are tax benefits and a greater range of ways to make profits compared to CFD trading.
Both styles of trading allow you to access global markets, are exempt from stamp duty, and leveraged products, yet there are key differences between spread betting and CFD trading like capital gains tax treatment and range of products. It is worth noting that both CFDs and spread bets are complex instruments and come with a high risk of losing money. Although both approaches to accessing financial markets can be profitable when trading over-the-counter (OTC) financial markets, it’s vital you are aware of the high risk, and the trading tools available to mitigate the risks involved.
A contract for difference (CFD) is a derivative product that allows you to speculate on whether a financial instrument’s market price will rise or fall in the short term. CFD traders are not actually purchasing the underlying asset, but instead speculating on future price movements of an asset.
You can develop trading strategies that include CFDs derived from various asset classes, ranging from forex to shares and commodities. Until recently UK brokers could offer cryptocurrency CFDs like Bitcoin, yet the FCA recently banned retail traders from accessing cryptos due to the high risk and volatility.
Similar to CFD trading, when financial spread betting you do not take physical ownership of the underlying asset. Rather, you place a bet on whether you think a financial instrument will experience rising or falling market prices in the future. When spread betting, you take a long position or short position with a pre-determined amount of money per each point of movement in the asset’s price.
Similarly to CFD trading, you can spread bet a diverse range of products derived from underlying markets, including currency pairs, indices and bonds. Certain brokers like Spreadex even offer spread betting on sporting events such as horse racing, tennis and rugby.
The key difference between the two derivative products is the tax treatment of profits. You must pay capital gains tax (CGT) on any profit you make on CFD trades but no stamp duty. Although it depends on your individual circumstances, for many, profits from spread betting are tax-free. You pay no CGT or stamp duty when spread betting, resulting in spread betting being more tax-efficient than CFD trading for UK and Ireland residents.
A summary of the key similarities and differences between spread betting and trading CFDs are outlined below. As you can see, there are commonalities between the two with the ability to trade long or short with leverage, 24 hours a day. The method of deriving market prices of CFDs and spread betting products is also the same, with the main difference being tax treatment.
When it comes to CFD trading, there are a vast number of brokers available that offer retail trading accounts. When searching for the best forex broker, it’s vital to assess the pricing structure, trading platforms, risk management tools and CFD products a broker offers. We found the top 5 brokers for CFD trading globally are:
Best CFD Brokers
As spread betting accounts are only available to residents of the UK and Ireland, all brokers offering this style of trading are regulated by the country’s main regulator, the Financial Conduct Authority (FCA). Most spread betting providers offer both spread betting and CFD trading, although pricing, market access and trading platform options vary between brokers. The best FCA regulated, spread betting providers in the UK include:
Best Spread Betting Brokers
Whether you are spread betting or CFD trading, your first step should be signing up for a demo account. Demo accounts allow you to practise trading financial markets with no risk of losing money, providing an excellent environment to build confidence and find a broker that suits your trading needs. As both styles of trading involve margined products, demo accounts are a great risk management tool, allowing you to practise and optimise trading strategies without the high risk that comes with live trading.
Justin Grossbard has been investing for the past 20 years and writing for the past 10. He co-founded Compare Forex Brokers in 2014 after working with the foreign exchange trading industry for several years. He also founded a number of FinTech and digital startups including Innovate Online and SMS Comparison. Justin holds a Masters Degree and an Honours in Commerce from Monash University. He and his wife Paula live in Melbourne, Australia with his son and Siberian cat. In his spare time, he watches Australian Rules Football and invests on global markets.