Understanding spreadbetting and CFD trading

Understanding spreadbetting and CFD trading

CFD & spread betting
Photo by @LittleIvan

Wherever you are based, understanding how these two types of trading work is a good idea. If you plunge in without doing your homework you could lose money.

We’re going to start by exploring the similarities and differences between spread betting and CFD trading. Then you can consider which method might suit you best.

Spread Betting vs CFDs – Key differences 

The single most important difference between spread betting and CFD trading is tax. Put simply, spread betting profits don’t attract capital gains tax (CGT), while CFD trading does. But, you’ll be pleased to know that this doesn’t just mean that your profits may be taxed. It also means that you can offset the losses you make via CFDs as a tax deduction.  

Obviously, the way the taxman treats your finances depends on your circumstances and which jurisdiction you are trading in. And remember, tax laws are often changed. You’ll need to be on top of this to ensure that you take the best trading decisions and trade in the markets that are best for you.

A few points of interest:

  • Spread betting is only available to U.K. or Ireland residents, while CFD trading is available worldwide.  
  • Because both CFDs and spread betting are essentially derivatives, that is you don’t take ownership of the underlying asset when you trade, you don’t pay stamp duty.  
  • All spread bets have fixed expiry dates, while CFDs don’t expire (except for futures). 

Take a look at the table below to get a snapshot of the main similarities and differences:                                               

 

Spread-betting

CFD trading

Who can spread bet and trade CFDs? 

Only U.K. and Irish residents can spread bet.  

CFD trading is available to many European and all U.K. residents.  It’s not available in the U.S.

Do I pay tax? 

You don’t need to pay tax on your profits. Tax laws do change, so check your circumstances and the rules relating to your jurisdiction. 

You do have to pay tax on any profits.

But you also get the opportunity to offset your losses against any gains you make.  

Do I pay a commission? 

You only pay the spread and no commission.


You may have to pay overnight rollover/swap charges. Check with your broker.

You might pay commissions on the trade and these can vary. 

You may pay overnight rollover/swap charges. Check with individual brokers. 

Available with MT4? 

Yes, spread betting is possible on your MT4 platform through CALUSO.

Yes, CFD trading is possible on your MT4 platform through CALUSO 

Spread costs start from 

CALUSO spreads on EURUSD start from 0.6 when spread betting.  

CALUSO spreads on EURUSD start from 0.6 when CFD trading.  

Minimum deposit 

Varies depending on your account size and available margin.  

Varies depending on your account size and available margin. 

Advantages 

  • Potentially tax-free betting for U.K. and Irish residents
  • Simple process
  • Spread cost only
  • Huge range of markets  
  • Leverage available
  • Can go long and short
  • Don’t own the assets
  • Limit risk
  • Can be used to hedge
  • Losses offset versus profits
  • Straightforward
  • Huge range of markets
  • Available pro traders
  • Leverage
  • Long and short
  • Limit risk   

Disadvantages 

  • Not available for pro traders
  • Not suitable for many trading goals
  • Limited markets to trade  
  • Tax exposure 
  • Commission charges can vary

 

 

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What is Spread Betting? 

This is essentially speculation on the price direction of an asset. Typically you’d spread bet on financial products but you can also spread bet on things like sports results.

When you spread bet on shares or commodities, you decide the amount to bet per point of movement in price. ​ 

Imagine you spread bet on a forex pair like EUR/USD and the currency pair moves in your favour. Your profit is calculated by multiplying your original stake size by the number of points (pips)the  EUR/USD pair has moved. 

  • If you buy EUR/USD at 1.1700 and stake £10 per pip
  • If the price rises to 1.1730 you’ve made 30 pips, that’s 30 pips x £10 = £300 profit
  • If the price falls to 1.1670 you’ve lost 30 pips, that’s 30 pips x £10 = £300 loss

How does spread-betting work? 

First, you decide the size of your spread-bet by selecting the amount you want to bet per point of price movement (£/pt). The profits and losses are then registered in the currency that you trade with (i.e. what’s in your trading account).

Spread-betting features

Trading hours – 24 hours if you’re dealing on forex and major stock indices, and during the underlying market hours for other markets. Selected markets will also allow weekend trading.

Leverage – Spread-betting is regarded as a leveraged financial product so you only need to deposit a percentage of the full value of the spread bet to open a position. 

Rollover – You pay rollover charges to keep positions open overnight. Generally speaking, spread-betting is suitable for intraday, daily and mid-term trading and investing.  

Hedging – You can hedge your positions using spread-betting, but CFDs may be more appropriate. 

Corporate accounts – As a retail trader you can’t open a corporate account for spread-betting, and you can’t have direct market access. 

Markets – You can spread-bet in lots of markets including, shares, forex, bonds, equity indices, sectors, commodities, and cryptocurrencies.  

Costs – You are charged a spread on every order you execute but you don’t pay commissions. 

Platforms – You can spread bet with CALUSO through MetaTrader4 on a desktop, a mobile app (iPhone, Android), tablet app (iPad).

What is CFD trading? 

Typically, trading a CFD (contract for difference) means buying or selling a specific number of CFDs in an instrument, as if you’re trading physical instruments. The key point with CFD trading is that you don’t own the underlying asset. Instead you simply trade on margin, by borrowing money from your broker to leverage your trade. You only pay a fraction of the actual trade cost. 

Title How does CFD trading work? 

As we’ve said earlier, when you trade financial derivatives such as CFDs, you deal in the prices derived from the underlying market, not on the underlying market itself. This means that CFD trading can be attractive to the Retail trader: 

Features and benefits of CFD trading

  • No set expiry dates 
  • you determine the size of your deal by selecting the number of contracts (or shares) you want to trade 
  • each contract has a fixed value
  • profits and losses are registered in the market’s base currency 
  • Leveraging of CFDs means that you only need to deposit a percentage of the full value of the trade to open a position
  • you don’t pay stamp duty as you would if you bought and sold shares, but you do pay capital gains tax
  • any losses you incur can be offset as a tax deduction
  • you pay overnight and rollover charges to hold positions.  

CFD trading is suitable for day trading and medium-term trading. Traders looking to use hedging strategies might find CFD trading appropriate.  Corporate accounts are available for CFD traders.

You get direct market access with CFDs, and you pay a spread on all markets except shares. A commission is charged on share CFDs, but there’s no spread charge. Desktop dealing through MT4 is available and you can use a mobile app (iPhone, Android), and a tablet app (iPad) to access the platform.  

Which is best for me, spread betting or CFD trading? 

The notes below might help you decide:  

Spread betting might be more suitable if…

  • You want profits to be tax-free 
  • You want control over the size of your market risk 
  • You want to deal in shares in smaller sizes and not pay minimum commissions 
  • You want to trade the markets in sterling 
  • You want to take a longer-term view on forex and shares  

CFD trading might be more suitable if…

  • You’re familiar with financial markets and the terminology used in trading 
  • You want DMA for forex and share trading  
  • You want to offset any losses against profits as a tax deduction 
  • You need a method to hedge using the tax-deductible features of CFDs 

CFD and Spread betting conclusion

Only you can decide whether to try spread-betting or CFD trading but we hope this lesson has helped you to decide. Please remember that spread-betting is only available to U.K. and Irish residents and do take care to consider the tax implications, the costs of trading (including the spreads and commissions) and your level of experience.  

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