Spread Betting vs CFDs
Spread Betting, and CFD trading allow investors to gain unique exposure to the global financial markets. They are both forms of derivative trading that offer similar benefits, such as leverage, a wide range of markets, profits on both rising and falling market.
By definition, Spread Betting involves speculating whether an underlying asset’s price will rise or fall. You choose your stake by deciding how much you will wager per point of movement. Spread bets are quoted in pairs (bid/ask prices). The bid price is the price at which investors go short, which is always lower than the ask price. The ask price is always higher than the bid price, which is the price at which investors go long.
The difference between the bid and ask prices is referred to as a spread. The spread constitutes the cost of opening a spread bet. For instance, consider going long on the GBPUSD currency pair at 1.2400 for £2 per point. If the price moves up by 100 points to 1.2500, you will have made a profit of £200, excluding any relevant costs.
On the other hand, CFDs are contracts between investors and their brokers to exchange the difference in the asset’s price between the opening and closing times of a trade. If your prediction is right, the broker pays you in the form of profits; and if you are wrong, you pay the broker in the form of losses.
Like Spread Betting, CFDs are simply derivative products, and there is no taking ownership of the underlying asset. CFDs are also quoted in pairs, but they are traded in lot sizes rather than simply points.
For instance, consider buying one standard lot size of the EURUSD contract at 1.1000. The pip value of 1 standard lot size is generally $10. If the price moves by 100 pips to 1.1100, you will have made a profit of $1,000. There is flexibility to trade fractional lot sizes depending on your risk management strategy. On the AvaTrade platform, there are different features available for spread bettors and CFD traders.
| FX & CFD Trading | Spread Betting | |
|---|---|---|
| Range of Markets | +1000 (FX, commodities, indices, equities, bonds and ETFs) | +150 (FX, commodities, indices, equities, bonds and ETFs) |
| Minimum Trade Size | From 0.01 lot | From 0.10 (10 per point on Forex trading and most other instruments). |
| Account Currency | EUR, GBP, USD | GBP |
| Maximum Leverage | ||
| Platforms | MetaTrader 4 & 5 & AvaTradeGo & WT | MetaTrader 4 & MetaTrader 5 |
| Tax Free Profits | No | Yes |
Differences Between Spread Betting and CFDs
While they may seem to be similar in most aspects, here are some of the ways that Spread Betting is different from CFDs:
Tax Free
The significant difference between Spread Betting and CFDs is the manner in which they are treated for taxation. There is generally no tax on Spread Betting in the UK and many other European countries. Investors, therefore, earn 100% of their profits, less any relevant charges.
On the other hand, CFD profits are subject to capital gain tax. This also means that losses in the CFD market are tax deductible. However, in both Spread Betting and CFDs, there is no Stamp Duty to be paid because investors do not take ownership of the underlying asset.
Price Quotes
In both Spread Betting and CFDs, prices mirror the real market prices of the underlying assets. However, on some Spread Betting platforms, quotes can be simplified so that it is easy to track the movement of points. For instance, if the current market price of the GBPUSD pair is 1.2455, it would be represented as 1.2455 on a CFD platform, whereas a spread betting broker may express it as 1245.5.
Expiry
All bets have a timeline after which an outcome must be settled. So Spread Betting contracts are bets, and they have expiry times. There are usually daily and quarterly spread bet contracts, but investors can roll over their bets if they have yet to achieve their market targets. On the other hand, CFDs have no expiry dates but still may incur rollover fees.
Market Dealing
In Spread Betting, you define your stake by determining how much you will earn per point of movement. For instance, you can choose to bet £5 per point. In CFDs, underlying contracts have fixed values per lot. Your stake will then be determined by the contract size you wish to trade.
Trading Platform
Spread Betting is conducted over the counter (OTC) via brokers, whereas CFDs can be offered through direct market access (DMA). While retail traders may not be able to see a massive difference in these methods, DMA generally allows for quick execution and lower transaction costs.
Trading Costs
When Spread Betting, your only cost is the spread. There may be additional costs if you wish to hold your trades overnight or extend the expiry times of your bets. In CFDs, transaction charges may include spreads, commissions, rollovers, and swaps.
Final Words
Both Spread Betting and CFDs allow investors to gain leveraged exposure to the opportunities in global financial markets. Choosing one method over another depends on your personal investing or trading needs. For instance, Spread Betting is a sensible option if you reside in the UK or Europe and need to make tax-free profits. On the other hand, if you want to use the derivative market for hedging purposes, trading on the CFD market is prudent because losses are tax deductible. Regardless of the method you choose, it is important to understand its mechanics and the risks and rewards you are exposed to.
AvaTrade provides both CFD Trading and Spread Betting accounts. Pick which one suits your needs or try both!
Spread Betting vs CFDs main FAQs
Spread betting and CFD trading are similar in that both involve speculating on the price movements of financial instruments, but the key difference lies in how profits and losses are taxed. Spread betting is often tax-free in many jurisdictions, while CFD trading may be subject to capital gains tax.
In spread betting, you bet a specific amount per point movement in the price of an asset. With CFD trading, you enter into a contract with a broker to exchange the difference in the asset's price between the opening and closing trades. The choice between the two depends on personal preferences and tax considerations.
Yes, both spread betting and CFD trading provide access to a wide range of markets, including stocks, indices, currencies (forex), commodities, and bonds. Traders can choose the instrument that aligns with their expertise and market outlook in either form of trading.
Both spread betting and CFD trading offer leverage, allowing traders to control larger positions with a smaller amount of capital. However, the specific leverage ratios may vary between the two, and it's crucial for traders to understand the implications of leverage on potential gains and losses.
Both spread betting and CFD trading platforms offer various risk management tools, such as stop-loss orders and limit orders, to help traders manage and control their risk exposure. Understanding and utilizing these tools is essential for responsible and informed trading in either method.
