What is the difference between CFDs and spread betting?

Thursday, 29 November 2012 10:57

Speculate on price movements with CFDs

Speculate on price movements with CFDs

Contracts for difference (CFDs) and spread betting are often grouped together when people talk about financial trading. While they certainly have similarities, it's important to understand how they differ if you want to start trading with either instrument.

Firstly, let's take a look at what CFDs and financial spread betting have in common.


The main way in which CFDs and spread betting are the same is in that you can speculate on upward and downward market movements. This means you can profit from price falls, as well as rises, thereby giving you the potential to make money from your investments even when market conditions are low – unlike with traditional shares trading.

However, you need to be aware that the value of investments can fall as well as rise, and any income from them is not guaranteed. When you speculate on financial markets, always remember that past performance is not a guide to future performance.

Another similarity between spread betting and CFDs is that you will never actually own the underlying instrument that you are trading on – you are merely speculating on whether the value will rise or fall.

CFDs and spread bets areleveraged products which are traded on margin, which means you do not have to pay the full value of the trade to open a position, but that you are still exposed to it. As a result, you can put down, for example, a ten per cent deposit on a trade worth £50,000 (so £5,000), but could still realise losses or profits based on the full value of the position.

This is one of the most important aspects of CFDs and spread betting to understand before you begin trading. Both these methods of trading carry a high level of risk to your capital and there is the possibility that you could quickly lose more than your initial investment.

Therefore, CFDs and spread betting are not suitable for every investor and you should make sure you fully understand the risks involved before you begin trading, and seek independent advice if necessary.


As you can probably see, CFDs and spread betting work in very similar ways, but there are areas where they differ. It's vital that you fully understand this before you make a decision about which, if either, of these methods you want to trade with.

Firstly, profits generated by CFD trading are liable for Capital Gains Tax (CGT), whereas those earned through spread betting are not. This does have the advantage that any losses you accrue while CFD trading can be offset against future profits for tax purposes, though.

You are exempt from stamp duty when engaging in either of these trading activities. Of course, tax rules depend on individual circumstances and are subject to change, so make sure you research your liabilities thoroughly before you start trading.

Secondly, financing charges for CFDs are applied separate to the cost of opening your position. This means you'll need to account for this outlay on top of what you spend trading. Typically, there is also a daily funding charge applied to CFDs for keeping a position open overnight.

Although on the face of it spread betting may appear to be commission-free, this is not the case. The cost of making the trade will usually be built into the spread itself, which means CFD spreads can often appear to be tighter than those offered on spread bets. A further key difference relating to the spread is that CFD traders can post orders within the bid-offer spread, whereas you simply have to accept the bid-offer available when you are spread betting.

Thirdly, CFDs do not always have an expiration date – it is up to the trader to decide how long they want to keep the position open for. Spread bets sometimes have a closing date, with such trades usually taken out on a daily, monthly or quarterly basis. However, day trades tend to be 'rolling' so they simply carry on indefinitely.



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