Contracts for difference (CFDs) and spread betting are two popular forms of derivative trading that allow traders to speculate on financial market movements. Both offer leveraged exposure and the ability to go long or short on a variety of underlying assets. However, there are some key differences between CFDs and spread betting in terms of costs, tax treatment, and regulation that traders should understand before deciding which is better suited for their needs. This article provides an unbiased comparison of the two derivative products.
Key Differences Between CFDs and Spread Betting
Here is a summary table comparing key differences between CFDs and spread betting:
| Feature | CFD Trading | Spread Betting |
|---|---|---|
| Trading Costs | Explicit spread + commissions | No commissions but spread built into quotes |
| Tax Treatment | Subject to capital gains tax, losses can offset gains | Tax-free profits, losses not deductible |
| Leverage Limits | Capped by regulation e.g. 30:1 for major forex pairs | No enforced regulatory limits, can be 500:1+ |
| Regulatory Oversight | Stricter rules by financial regulators | Regulated by gambling commissions in some jurisdictions |
| Market/Asset Coverage | Wider range of markets and niche assets | Major markets well covered but fewer exotic assets |
Trading Costs
One of the main differences between CFDs and spread betting lies in the trading costs involved.
CFDs entail an explicit spread and commissions. The spread is the difference between the buy and sell price quoted by the CFD broker. This built-in cost must be overcome through favorable price movement before gains can be realized. CFD brokers may also charge commissions on each trade.
In contrast, spread betting does not have an explicit spread or trading commissions. Instead, the spread is built into the quotes provided by the spread betting firm. While this may appear to have lower upfront costs than CFDs, the firm’s margin covers the trade costs.
Overall, cost comparison depends on trade size, frequency, and broker. Active traders making many small trades may find CFDs less costly while larger position traders may prefer spread bet costs.
Tax Treatment
CFDs and spread betting differ in their tax treatment in many jurisdictions.
Profits from CFD trading are subject to capital gains tax while losses are eligible for offset against future capital gains. The capital gains tax rate depends on the jurisdiction but is often lower compared to income tax rates.
Meanwhile, spread betting profits are exempt from capital gains tax in most countries including the UK. However, spread betting losses cannot be offset against other capital gains for tax savings purposes.
This difference in tax treatment makes spread betting more appealing for active traders expecting to generate frequent short-term profits. But CFDs may be preferred for longer-term position traders who benefit from lower capital gains tax rates.
Leverage Limits
CFDs and spread bets both allow traders to trade on margin, amplifying exposure beyond the invested capital. However, leverage limits differ between the two derivatives.
In the European Union, CFD leverage has been capped at 30:1 on major currency pairs and 20:1 on other assets per ESMA regulation. Other jurisdictions like the UK and Australia also impose lower maximum leverage limits on CFDs.
Meanwhile, spread betting currently has no regulatory caps on leverage. Brokers offer leverage levels well above 30:1 and up to 500:1 on certain markets. The lack of enforced leverage limits gives spread bettors more flexibility in controlling their risk-reward profile.
Market and AssetCoverage
CFDs and spread betting largely cover the same asset classes including forex, indices, equities, commodities, and cryptocurrencies. However, CFDs tend to offer wider coverage of regional markets and a greater number of individual assets.
For instance, CFD brokers provide access to thousands of global stocks, ETFs, and currency pairs. Spread betting firms cover major assets but a more limited selection overall. Some exotic forex pairs, small cap stocks, and crypto tokens may only be available via CFDs.
So traders seeking exposure to specific markets or assets, especially more niche ones, are likely to have better success with a CFD provider. Those focused on major asset classes may find adequate coverage with either product.
Key Similarities Between CFDs and Spread Betting
While CFDs and spread betting have several key differences, they also share some common attributes that make them appealing for traders:
- Both offer leveraged exposure allowing traders to magnify profits (and losses). Margin requirements are low – often 1-3% of the notional position value.
- Ability to easily go long or short. Traders can capitalize on falling prices as easily as rising prices.
- No expiry dates like options. Open positions can be held indefinitely rather than expiring at a set date.
- Variety of markets and asset classes to trade beyond just stocks and forex.
- Competitive spreads and no trading commissions (in spread betting).
- Real-time streaming quotes and advanced trading platforms provided.
- Tight spreads and fast execution ideal for short-term trading and scalping strategies.
So both products cater well to active traders seeking leveraged exposure to financial markets with low upfront costs. The similarities center around trading flexibility and advantages over trading the actual underlying assets.
Which is Better for You – CFD or Spread Bet?
Determining whether CFDs or spread betting is more suitable requires understanding one’s individual trading profile including factors like:
- Typical trade holding period – Intraday scalping favors spread bets while longer swings suit CFDs.
- Number and size of trades – Frequent small trades benefit more from spread bet costs.
- Markets and assets traded – Niche interests better served by wider CFD coverage.
- Importance of leverage limits – Spread betting offers higher leverage.
- Tax status and implications – Spread bets exempt from capital gains tax.
- Preferred regulatory jurisdiction – Stricter EU CFD regulation appeals to some traders.
Thus, CFDs and spread betting share similarities in providing leveraged derivative market access. But differences in costs, tax treatment, regulation, asset coverage, and leverage impact their comparative appeal to traders.
Lower friction costs of spread betting benefit high volume traders making repeated small trades during short-term market moves. Meanwhile, CFDs appeal to position traders holding longer term swing trades and needing specific asset or regional market access.
Determining one’s individual trading profile and priorities will indicate if CFD or spread betting is better suited. Both remain popular speculative trading instruments in their own right. The key is aligning their respective strengths and weaknesses with the trader’s objectives.