The difference between spread betting vs CFD trading is a topic that needs an explanation. Seeing as it is something that has cropped up multiple times on discussion boards, there is clearly some uncertainty there. Even though spread betting is only a UK product, it is worth putting together a clear response with some easy to differentiate points.
Before we get to differences of spread betting vs CFD forex trading, we need to understand what spread betting is and how you can use it effectively.
What is spread betting?
Spread Betting is regulated by the FCA in the UK, and they provide a really simple definition in their handbook. Spread betting is a derivatives based product, meaning you do not hold the underlying asset at any stage, you merely ‘bet’ on the direction of the market movement, and by how much the market will move.
In a normally weighted binary choice such as ‘heads or tails’ when flipping a coin, each of the outcomes carry an equal chance of appearing. In a battle of ‘David vs Goliath’, the chance of a David win would be much more unlikely (unless you know the story and outcome in advance), and thus the chances of seeing a David win would be less likely.
When two outcomes have different likelihoods of occurring, to even the scales one outcome can be given a head-start, or the other starting off a handicap (as takes place in the game of golf). This is done to level the playing field, or equalise the outcomes closer to the 50/50 you encounter in a heads/tails coin-toss.
Spread betting when it comes to sports events typically follows the example above.
Spread Betting Forex
In the forex market, you would typically be betting for or against one currency against another in the form of a pair. When you are looking at spread betting forex from a financial markets perspective, the spread is the difference between the live market price and the price at which you can go long or short.
If you were considering trading USDGBP (US Dollar vs Pound Sterling) when the live exchange rate was 0.80, you may be offered to buy (go long) at 0.81 or sell (go short) at 0.79. You never need to own the asset for this, you will just profit on the movement. The spread in this case is how a spread betting broker makes money.
Your spread would be calculated as the difference 0.81-0.80 = 0.01. In a long bet, when you close the trade, every point above 0.81 would equate to profit, differing in amount depending on the size of the trade. In a short bet, every point the USD drops below 0.79 would equate to profit.
There are a few different variables you can adjust with any spread bet to determine the value of any outcome. Your leverage, margin, bet duration and bet size can each be adjusted to differing effects.
Spread Betting Forex Terms
Leverage – the multiple of exposure you receive vs the amount of capital required. A trade using capital of £100 with leverage of 1:30 is in fact opening a position with £3000 (100*30) but without having to deposit the full amount. The leverage you can trade with will depend on the underlying asset traded.
Margin – margin as a term is thrown around quite a lot in financial circles in the guise of margin call, margined out, or trading on margin. You also have deposit margin and maintenance margin.
Effectively, deposit margin is the amount of deposit that you have put towards any trade. The amount of the leverage accounts for the remainder of the value. The maintenance margin is the amount you may need to pay on top of your additional deposit if you do not choose a broker with negative balance protection. In these instances, your trade will be automatically closed out (margin call) if your balance has been absorbed by losses.
Bet Size – This is the value in £ that you are staking on every point movement. The point can be 0.01, 0.001, 0.0001, depending on your selection and the underlying asset. If you were to stake £5 on each 0.01 unit movement, every point in either direction from the trade price would have a return of £5.
Bet Duration – this is the length of time before your bet expires. Meaning you will need to close out your position before this period, or else it will automatically expire. There are various options here ranging from one day through to many months that effectively work as futures options. If you choose a longer duration, the spread is usually higher as the broker needs to provide finance for your trade for a longer period, which causes them greater expense.
Spread Betting tips
Once you have in mind the margin and leverage you want to use, alongside the bet size and duration, you still need to know a few tips before considering spread betting vs CFD trading.
- Have a proper risk management strategy. When trading with leverage, you need to be especially careful seeing as small market moves have the potential to amplify your losses beyond what you had planned to risk.
- Trade only with properly FCA regulated brokers.
- Try a demo account first, learn the fundamentals.
- Do not chase losses by increasing bet sizes.
- Trade what you know. Every market has its’ own nuances; always better to stick to what you know and only trade in other markets once you have spent some time learning the fundamentals and tested your trading strategy. You can gain some additional knowledge from our how to trade section which covers various instruments separately.
Is CFD the same as spread betting?
In a word, no.
Whilst there are a lot of similarities between spread betting vs CFD trading, they are not the same thing. The main things you encounter with both are the options to trade both with and against a product, 24 hour market dealing, and leveraged trading on an asset that you do not own.
The usual differences include pricing structure, tax treatment of profits, fixed vs unlimited trade duration, and the way you interact with the market.
CFD or Spread Betting?
This is not a simple one size fits all answer, unless you are a non UK resident, in which case you cannot spread bet regardless. There are some significant advantages to both forms of trading mentioned but one should not overlook the tax treatment.
Spread betting has the distinct advantage of not having any capital gains tax liability, which if you are a successful trader is a huge upside. There is also usually no commissions charged on any of your trading, just the spread between market and bid price. Spread betting profit and loss calculation is also usually much simpler to evaluate than with some CFD contracts.
The market interaction of CFD trading allowing direct market access can get you access to better pricing. It can also provide more instruments to trade, depending on the broker you are using.
The range of brokers you can choose to engage with will be much wider with CFD trading. The pure reason for this is that CFD trading is a lot more global in nature than spread betting, which is limited to the UK.
Spread Betting Vs CFD – A simple comparison
|Tax Treatment||No CGT, No Stamp Duty||No Stamp Duty|
|Typical Charges||Spreads only||Spreads/Commissions|
|Deal Size||£ per point||Standard Contracts|
|Hedge Owned Assets||Yes||Yes|
|Market Access||Via Market Maker||DMA Possible|
To wrap up our coverage of spread betting vs CFD trading forex, you can see that spread betting has come out top in 4 categories to the 3 of CFD trading. Both are really good products that have strong advantages for you to consider. The tax treatment can be the key difference maker.
After all, less tax paid on profits, equates to more profit in your trading account.
If you are considering trading with leverage and are looking at spread betting as an option, take a look below to see the brokers that offer this in the UK under FCA regulation.
Spread Betting Brokers
IG have more than 17,000 instruments traded under the spread betting offer of this industry giant. Nearly 50 years in the business and a mainstay of the UK market, IG are a golden choice for your Spread Betting experiences. Demo platforms also available.
Pepperstone are a 10 year industry player with a forex specialism. More recent to the spread betting scene but don’t let that put you off. What Pepperstone do, they do really well.
ATFX are the youngest of these established FCA regulated brokers to bring a spread betting offering. Again, another forex specialist here with fewer instruments than you will find at the very top end of this list.
Spreadex are a recent spread betting award winner in COLWMA 2020. Trading since 1999, Spreadex have more than 20 years experience as a specialist spread betting broker and moved into financial trading in 2006. Also offer sports spread betting under the same platform.