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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Spread Betting vs CFD Trading
If you are in the United Kingdom (UK), Ireland, or Wales, you are able to spread bet and trade CFDs such as Forex with your retail investor accounts. Traders from other major financial hubs around the world, unfortunately, are not able to spread bet as the country’s 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, trade with leverage and are exempt from stamp duty. However, 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 that you are aware of the high risk and the trading tools available to mitigate the risks involved.
What Are Contracts For Difference (CFDs)?
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.
What Is Spread Betting?
CFD trading and financial spread betting are similar in the sense 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.
Similar 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. You can view our what is spread betting guide to learn more about the concept.
Spread Betting And CFD Trading Differences
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 is 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.
| Spread Betting | CFD Trading | |
|---|---|---|
| Availability to retail traders | UK and Ireland residents only | Worldwide |
| Leveraged trading | ✔ | ✔ |
| Deal size | Punds per point | Number of contracts |
| Calculating profit and loss | The difference between the entry and exit price * stake | The difference between entry and exit price x number f CFD x size of contracts |
| Profits are subject to stamp duty | ✘ | ✘ |
| Profits are subject to Capital Gains Tax (CGT) | ✘ | ✔ |
| 24 hour trading | ✔ | ✔ |
| Prices derived from underlying asset | ✔ | ✔ |
| Go long/short | ✔ | ✔ |
| Holding costs | ✔ | ✔ |
| Currency deal size | All in £ (limits foreign currency to risk) | In the currency of the CFD |
What Are The Best Brokers For CFD Trading?
When it comes to CFD trading, there are a vast number of brokers available that offer retail trading accounts. When searching for the best UK regulated 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:
- Pepperstone is the best broker overall with ultra-tight spreads from 0.0 pips and the best trading platforms worldwide (MetaTrader 4, MetaTrader 5, and cTrader).
- IC Markets provides an ECN trading environment with low spreads and a diverse selection of CFDs.
- Markets.com has competitive no commission spreads plus top trading tools on its proprietary trading platform, Marketsx.
- Plus500 is a good option for beginner traders that require a simple pricing structure and strong risk management tools.
- eToro provides access to a social-copy trading network with account mirroring features.
What Are The Best Brokers To Place Spread Bets With?
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.
You can view our full spread betting platform page with a summary below:
- Pepperstone is a great option for either spread betting or CFD trading, with tight no-commission spreads, excellent trading tools, and no minimum deposit.
- IG is ideal for beginner traders that want an easy-to-use trading platform and a good range of CFDs.
- City Index is good for beginner spread betters with premium order types for risk management.
- CMC Markets is a well-established spread betting and CFD broker with over 9,500 financial instruments to spread bet.
- ThinkMarkets – suited to all levels of trading experience with a choice of trading platforms, trading tools, and financial markets.
Other brokers include:
- Spreadex is the only broker to offer sports and financial spread betting along with CFD trading. We likes their spread betting app.
- Accendo Markets is a UK-based spread betting and CFD broker. They allow both online trading and betting via phone
Overall, make sure the spread betting broker is FCA regulated and understand if they allow you to trade the types of instruments you are interested in. For example, only some brokers allow FTSE spread betting while others specialise in more exotic forex pairs.
How Do I Get Started?
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.
View our how-to-spread bet page to learn more about this type of trading and getting started.