Most UK traders will prefer to spread bet over using CFDs (Contracts for Difference). This is simply because spread betting is by U.K. law, considered gambling and is, therefore, free of Capital Gains Tax (CGT) whereas CFD trading is taxable. If, however, you did lose more than you made against the markets whilst trading CFDs, you are entitled to claim those losses against your tax bill. Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

In terms of placing orders, closing trades, opening trades and the market movements themselves, there is no real noticeable difference to the individual retail trader between trading CFDs and spread betting.

The gritty definitions of spread betting and CFDs

Spread betting by definition is the speculation on the price movement of a particular financial instrument such as but not limited to, stocks, forex or commodities. Therefore, you are not purchasing the underlying asset and owning said stocks or currencies, you are merely betting on which way the price will go.

CFDs are tradeable securities, a legally binding contract between two parties, in this case, the trader and the broker. CFDs use margin for leverage.

Fig. 1 – Chart showing a CFD purchase and sale.

Is it better to spread bet or CFD trade?

Spread betting is only available to UK residents and is governed by the UK’s Financial Conduct Authority (FCA). Any broker that wishes to offer spread betting to UK residents must be registered with the FCA. For example, when you search for an FCA registered broker’s FCA number on the website you will see that they comply with the strict rules that the FCA set and confirm that they are regulated.

Your eligible deposits with CMC Markets are protected up to a total of £85,000 by the Financial Services Compensation Scheme (FSCS).

For example, if you have £500 in your account and a trade slipped so drastically that the broker closed your position at a loss greater than your account value, say negative £100, a regulatory protection in place means the broker will set the balance on your account to zero.

The risks are difficulty in withdrawing your deposit and earnings, open to scams, trading against the broker instead of your trades going out to market, lack of liquidity causing slippage .

The disadvantage of choosing a spread betting account governed by the FCA as a retail trader is that the leverage that you are offered is limited by law to 30:1.

Typically, spread betting brokers will offer easy to calculate costs by having all the costs joined into one fee, the fixed ‘spread’. Spread is the difference in cost between the buy and sell price. This is how the broker takes their cut for sending your orders off to the market. Brokers typically will charge 1-1.5 pips for the major currency pairs for opening and closing a trade.

When CFD trading, you may find that the fees are not collated and is, therefore, harder to understand how the costs are calculated. For example, there may be swap fees, commission fees, variable spread fees, opening fees and closing fees.

According to the FCA website, the leverage that is limited varies depending on the financial instrument you trade. These are as follows:

  • 30:1 for major currency pairs;
  • 20:1 for non-major currency pairs, gold and major indices;
  • 10:1 for commodities other than gold and non-major equity indices;
  • 5:1 for individual equities and other reference values;

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage . The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. 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.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.