Spread betting vs CFD accounts, what is the difference?
- Senior Trader
- Feb 1, 2017
- 3 min read
We have been asked this question many times by our students, hence we have compiled a list of check points to clarify the pros & cons of each, to make it as simple as possible.
Firstly traditional shares can only be traded in one direction and cannot be leveraged (margin trading). So you will need the full price of each share value to trade.
Spread Betting - What is it?
Spread betting is a type of trading account whereby a brokerage offers you to place a buy or sell order, in return they gain a commission in the form of a spread. Spread betting is classed by the UK authorities as technically gambling, where we have an opinion as to what direction the market is going in either up or down. Due to it being classed as gambling we cannot be taxed for this.
The reason why authorities do not tax you on profits, will mean the people who have losing trades would be able to offset their losses against tax. Unlike trading traditional shares profits made from spread betting are exempt from stamp duty and capital gains tax (CGT) in the UK.
Who can spread bet and trade CFDs? -
Only customers from the UK & Ireland.
Can you open a SELL trade?
You can go long as well as short. Take a long position when market prices are rising or open a short position when prices are falling.
Is there a Commission charge?
All depends on your brokerage account
Is there any additional costs?
An additional spread is built into the prices displayed on our platform, which is applicable upon execution of any order. Holding costs may apply to spread bets.
How can you calculate profit and loss?
To calculate your profit or loss, find the difference between the price at which you enter and the price at which you exit, then multiply this difference by your stake.
Margin trading
Spread betting is a financial leveraged product, which means you only need to deposit a small percentage of the full value of the spread bet in order to open a position, therefore you can leverage more capital for your position.
CFD Contract for Difference) - What is it?
The broker matches buyer and sellers, the buyer takes one side of the contract the seller takes the other. If you win the position you receive the difference in the contract price, if you lose you pay the difference. The main difference between the two is: 'Direct market access' - (DMA) Direct market access gives all FX traders a direct link to the interbank market rates. This means the spreads are generally tighter - more competitive.
The broker matches buyer and sellers, the buyer takes one side of the contract the seller takes the other. If you win the position you receive the difference in the contract price, if you lose you pay the difference.
Tax Efficient trading - Since you don't own the underlying asset when trading CFDs, there is no stamp duty to pay, however, you will be subject to capital gains tax.
Who can spread bet and trade CFDs?
Available to customers globally.
Can you open a SELL trade?
Ability to go long as well as short so you can take a long position when market prices are rising or open a short position when prices are falling.
Is there a commission charge?
When trading CFD shares on a platform, a commission will be charged to your account upon execution of any order. This is in addition to the spread.
Is there any holding costs?
With CFDs, holding costs may apply.
How can you calculate profit and loss?
With CFDs, your profit or loss is determined by the difference between the price at which you enter and the price at which you exit, multiplied by the number of CFD units.
Margin trading
CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position
Comments