Contracts for difference (CFD) trading closely resembles traditional trading in that you are trying to make a profit from the price difference between the opening and closing of trades in an underlying market. The contracts expire when you sell them. While both are leveraged derivatives that allow you to enter a market with a smaller investment, they do have several differences that will determine how and when you use them. Spread betting and contracts for difference trading (CFD) are two leveraged trading options that allow you to take a position on rising or falling markets without having the complications or burden of owning that particular asset. While the two are very similar, most experienced traders and investors consider them to be quite different when it comes to their trading strategies. As some investment situations suit one more than the other, knowing the difference between spread betting and CFDs is essential if you want to be a successful trader and not lose money.
What Is Spread Betting?
Spread betting is a trading strategy that lets you speculate whether an asset’s price will rise or fall. Instead of buying and selling an asset, you decide your stake (pounds per point of movement) and bet whether it is long (price will increase) or short (price will decrease). For every point that asset moves in your desired direction, you earn a profit. Every point in the opposite direction, you make a loss. From the trading data, you speculate Tesco share prices are going to increase, and you decide to bet £30 per point long. By the time your bet expires, the share price has risen five points (equal to 5 pence). You are now £180 in profit. In every spread bet there are two prices quoted: The first is the bid price, which is the price at which an investor ‘buys’ the asset. The second is the ask price, which is what an investor sells it for. The difference between the two is known as the spread. Brokers will take a small portion of the spread as profit, but they do not take any commission. You can place a spread bet on any type of asset, including cryptocurrencies, currency pairs, stocks, commodities and indices and for any outcome. Similar to traditional trading, you only discover your profit or loss when the bet closes.
Top 3 Spread Betting Brokers
Having launched in 2010, Pepperstone is a relatively new broker compared to the others we have listed so far. However, it has grown exponentially over the past 10 years to become a reputable, popular broker. With over 89,000 clients globally, Pepperstone has firms all over the world and has won several different awards and accolades for its training and educational resources, including Best Client Relationship Manager at the Professional Trader Awards in 2019. Pepperstone is known for its low trading fees and is regulated by the FCA, Australian Securities and Investments Commission (ASIC), and other regulatory bodies – all listed on its website. It uses some of the best trading platforms available, such as TradingView, MetaTrader 4, MetaTrader 5 and cTrader, available on mobile, tablet and desktop. Pepperstone also provides access to raw spreads, offers a super-execution, trades over 1,200+ instruments and is financially transparent. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78.8% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. It offers a 20% welcome bonus up to $10,000, according to regulation and a free 21-day demo account with $100,000. Instruments include:
Metals Commodities Stocks FX Options Oil ETFs Options Crypto currencies CFDs Indexes Shares Spread betting Indices Forex Bonds
AVATrade EU Ltd is regulated by the Central Bank of Ireland. (No.C53877) Ava Trade Markets Ltd. is regulated by the B.V.I Financial Services Commission. It is also highly regulated in Australia, South Africa, Japan, Middle East, Cyprus and Israel You can not trade with AvaTrade in the US, North Korea, New Zealand, Iran or Belgium. Mínimum deposit of $100, no withdraw limit and no fees.
Its strong points include:
No minimum first-time deposit No commissions Several payment methods for deposits and withdrawals Tight spreads from 0.5 pips
It offers one of the best execution speeds in the industry with low latency below 0.004s. It utilizes the most advanced technology to improve users’ trading efficiency – users can automate trades, build integrations and create trading apps using ActivTrades’ market-leading CFD and spread betting technology. Exceptional trading infrastructure is available on ActivTrader and MetaTrader 4 and 5. ActivTrades invests deeply in specially developed educational materials for its clients – including webinars, regular outlooks, manuals, etc. Type of offers: ActivTrades focuses on well-developed products in its trading portfolio. Customers can choose from over 1,000 CFD or spread betting instruments across forex, indices, shares, commodities, financials and ETFs. It also offers investing solutions for its institutional partners. Spread betting allows UK residents ONLY to trade the prices of financial instruments, including forex, indices, commodities and LSE shares. Spread betting and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread betting and CFDs work and whether you can afford to take the high risk of losing your money You buy and sell a contract that follows the price movements of its underlying market, exactly as you would any normal trade. For example, buying a CFD of British Airways is the same as buying BA stock. The difference is you do not take ownership of that asset. To bet short, you would sell CFDs rather than buy them. As this is a margined product, there is the chance for a relatively large position using a small amount of capital. However, this means that investors can lose or win a large amount, regardless of the deposit amount.
Top 3 CFD Brokers
1. eToro
eToro features include:
Access to over 800 stocks No commission to pay (0% commission applies to stock investment, spreads will be applied to CFD products) $200 minimum deposit (eToro operates in USD only) Regulated by the FCA, CySEC and ASIC
The trading platform is native to eToro and has been designed with new traders in mind. 80.2% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your mone With over 2,000 stocks, Plus500 is an easy-to-use platform with lots of educational material, a demo account and customer service 24/7. There is a £100 minimum deposit but no fees for:
Deposits Real-time quotes Dynamic charts and graphs Live share CFD prices Opening and closing of trades Rolling position
Plus500 uses its own platform that comes with a trading app. Though Plus500 is very user-friendly, CFDs are ‘complex financial products’, thus the platform is not suitable for beginners/inexperienced traders. It is regulated by the FCA and listed on the London Stock Exchange. XTB is a trusted all-around broker, established in 2002. It is regulated by the FCA and listed on the Warsaw Stock Exchange. There is no minimum deposit for opening an account. XTB uses its xStation 5 platform, which offers good customisation, search functions and modern design. As a platform, it has all the standard educational resources and research tools. It has over 2,000 stocks, though all cryptocurrency trading is paused on weekends. Overall, the only negatives of XTB are that its fundamental data is limited, and there are high fees for some CFD trades.
As both products are leveraged, there is the potential to make large profits with a small investment. Perfect for those with a limited trading budget. Both spread betting and CFDs are exempt from stamp duties, as you do not physically own any assets. You can trade both long and short using a variety of indices, currency pairs, stocks and commodities. You can trade at any time of the day and week, depending on the trading platform. Spread betting and CFDs allow traders to enter the market and gain exposure and experience with leverage already in place. There are thousands of other online tools and platforms to plug into MT4 that support spread betting and CFD trading. Both spread betting and CFD support short, medium and long-term strategies. You might have to pay funding costs to hold your bets overnight.
Tax efficiency – CFD trading is liable for capital gains tax or income tax. Spread betting is exempt from all taxes. Contracts – With spread betting, the contract is based on pound per point. With CFD trading, your contract is based on the amount of the underlying market. Profit – With spread betting, the profit is calculated as the difference of buy and sell multiplied by the stake. With CFD trading, the profit is the difference between the entry and exit price, multiplied by the number of CFDs, multiplied by the size of the contract. Duration – There are no expiry dates in CFD trading but there are in spread betting. These expiry dates are typically far into the future, however, you can have a very short expiration of a day, if you want. Location – Spread betting is only available in the UK and Ireland; CFD trading is global. Commission – Spread betting is commission-free, while CFD brokers may take a percentage of the profit for themselves. Payments – CFD trading profits are paid in the currency of the underlying market. Spread betting profits are paid in GBP.
Which Is Better: CFD or Spread Betting?
When it comes to CFD trading vs spread betting, deciding which option to use and when comes down to research, knowledge and confidence. Spread betting might be the better option if you:
Prefer not to pay any tax Want to make your trades in GBP Like more control over the size of your bet Don’t have the budget for minimum investments and commissions Want the freedom to choose when your bets close
Alternatively, CFD trading might work better in situations where you:
Want a corporate trading account Have the skills to hedge your trades for tax benefits Want physical assets in your investment portfolio Prefer traditional trading but don’t want ownership of the asset
The one that is best for you depends on your goals, trading strategy and budget. You should also consider the platform fees, resources and trading tools. The best platforms to consider are Interactive Brokers, eToro, FOREX.com, IG and XTB. The best trading platforms typically also have their own educational programmes and resources for you to work through. However, if you use your tools and resources properly and apply your risk management procedures, spread betting can be profitable. When you have decided on a trading platform, you should spend time on a demo account to perfect your trading strategy and familiarise yourself with the markets and products. When trading with a real account, always make time to research the industry and markets, be aware of what’s happening in global economies and politics, and use the data and tools you have available. The second technique is ‘trend market spread betting’ where you use your data to find a trend in the market, and you make a bet in line with it. The third is ‘breakout spread betting’, which involves entering a market as early as possible before it takes off and the prices escalate. The final technique is ‘news-based’, where you use current global events and happenings to find areas in the market that could be profitable. Both have tax benefits, allow you to enter a market with leverage and a small investment, and have scope for large profits. What is the difference between cfd and spread betting? Spread betting is exempt from all taxes, while CFD trading is subject to capital gains tax. The profits are calculated differently, and only CFD trading is a global strategy. Spread betting is only sanctioned in the UK and Ireland. Both options are not suitable for all situations. Before deciding which one to go with, consider your trading goals, location and currency you want to trade in. WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
