CFD vs. Spread Betting

Both CFDs (Contracts For Differences) and spread betting are two financial products used by traders in the United Kingdom to take positions in their financial markets. The two products share some similarities, and also have their differences.

The similarities are many. Both are derivatives, similar to options or futures, used to bet on an underlying financial product, like a stock, currency or commodity. Both CFDs and spread betting can be utilized to take long and short positions. Unlike the underlying products from which they’re sometimes derived, both CFDs and spread betting are exempt from the UK’s 0.5% stamp duty.

Another feature of both is that they can be traded on margins, usually ranging from 10% to 20% of the full amount to be controlled. This can help a trader who doesn’t have a lot of capital to amass a lot of money if he’s right; however, the reverse is also true, and if the trader is wrong, he can equally lose just as much. If such an unexpected loss occurs, a margin call will be made, and the trader would be responsible for placing the necessary funds in his account if they weren’t already there.

There are differences between CFDs and spread betting. One difference is the price. CFD’s bid and ask prices trade much more closely, if not exactly in line with the derivative they represent, while with spread betting the ‘spread’ is much wider. The reason (and another distinction between the products) is that spread betting prices have a commission built into them, which is set by the market maker. For a CFD, though the ask and bid don’t include the commission, an approximate amount of .10%, of the investment is charged to the trader when opening, and again when closing, the position.

Another difference is that spread betting profits are free from capital gains taxation, while CFDs are subject to taxation. As well, spread betting is confined to certain expiration dates, while CFDs are not.

In summary, the two (CFDs and spread betting) are a popular means for traders in the United Kingdom to trade the financial markets. As we’ve seen, they share some features, and differ in other areas as well.

1. CFDs and spread betting are both derivatives, and can be done on margins – with applicable margin calls when necessary.

2. Neither is subject to UK stamp duty.

3. Prices for CFDs mirror underlying products. Spread betting does not.

4. CFDs are subject to capital gains taxation, whereas spread betting isn’t.

5. CFDs don’t expire, while spread betting does.

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