CFDs vs spread betting: what’s the difference?
These leveraged products appear to be the same, but they have quite a significant difference between them. Find out how they differ from one another with this guide.
Leveraged products like CFDs and spread betting can be really popular with experienced investors as it has the opportunity to get higher returns than share trading. They can be especially popular as you don’t necessarily need to pay the full value upfront, but this is also why they can be especially risky.
Another reason why these types of investments differ from traditional share trading is that you can benefit from any movements in the value of the asset, not just an increase.
What are CFDs and spread betting?
Before understanding the difference between contracts for difference (CFDs) and spread betting, you first need to know what they are.
Spread betting is a bet on the movement in the value of an asset. It’s pretty similar to a bet on the name of the next royal baby or whether a novelty song about sausage rolls will get Christmas number one this year, except the outcome can only be one of two possibilities, an increase in value or a decrease in value.
With spread betting, you make a bet on the movement, as mentioned, but you’ll bet per point that it moves.
So, instead of saying “I bet £5 that Apple’s stock price will move up”, you’re saying “I bet £1 per penny that Apple’s stock price will move up”. Now, if Apple’s price does move up, you get £1 for every penny it moves. If it moves down, you lose £1 for every penny. This is a pretty basic way of looking at it, but it’s essentially how it works.
Contracts for difference are also kind of like bets on the movement in the market, but the amount you gain depends on the degree to which you were right or wrong.
So, you can choose to “buy” at a price then “sell” at a later time. The amount you have gained or lost is worked out with the difference between the “buy” price at the time you opened your position and the “sell” price when you closed it.
See how CFDs and spread betting compare side by side
|What is it?||Staking an amount on the direction of movement and per point of the movement.||Trading a contract to exchange on the difference in value between the open of the contract and the close of the contract.|
|Tax||No capital gains tax.||Taxable, but profits can be offset against losses for tax purposes.|
|Stamp duty||No stamp duty||No stamp duty|
|Trading hours||For forex and indices, you can deal 24 hours a day. Other markets allow you to deal during their market hours.||For forex and indices, you can deal 24 hours a day. Other markets allow you to deal during their market hours.|
|Expiry dates||Generally have a fixed expiry date quite far away||Don’t have expiry dates, except for futures|
|Dividends||As you dont own the underlying asset, you aren’t entitled to dividend payments but your provider may make adjustments.||As you dont own the underlying asset, you aren’t entitled to dividend payments but your provider may make adjustments.|
|How it works||Choose how much you want to bet per point of movement.||Choose how many contracts you want to trade. Contracts will have a fixed value.|
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