Spread betting vs CFD trading

CFD trading and spread betting are both popular forms of speculative trading, but there are some key differences between them. Learn what sets them apart before you take a tax-free^* position when you spread bet or trade CFDs on our full range of markets.

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^*All profits made in spread betting are exempt from UK Capital Gains Tax and UK stamp duty. UK and Irish tax laws are subject to change and individual circumstances may vary.

Explaining the differences: Spread betting vs CFD trading

What is spread betting and CFD trading? Is spread betting the same as CFD trading? Should you spread bet or trade CFDs? We’ll break it all down in this guide.

What is spread betting?

Spread betting is a tax-efficient alternative to conventional trading. Spread bets are financial derivatives that let you speculate on the price movements of various underlying assets but you don’t own the underlying asset. You can go long or short on a wide range of global instruments. This means that if you believe the price of an instrument (for example, the UK 100 or US Wall St 30) will rise, you may go long or buy the instrument. If you believe the price of the instrument is likely to fall, you may sell or take a short position. If you were right, you could make a profit, otherwise you’d make a loss.

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What is CFD trading?

CFDs (Contracts for Difference) are also financial derivatives that let you speculate on the price movements of various underlying assets but you don’t own the underlying asset. You can go long or short on a wide range of global instruments, which means that if you believe the price of an instrument (for example, the UK 100 or US Wall St 30) will rise, you may go long or buy the instrument. If you believe the price of the instrument is likely to fall, you may sell or take a short position. If you were right, you could make a profit, otherwise you’d make a loss.

When trading CFDs, you’ll enter a contract to exchange the difference in the asset's price between the opening and closing of the trade. When you open a trade, you can choose how many contracts you wish to buy or sell for the asset and the total value of your position is decided by the number of contracts you choose, multiplied by the value of each contract.

With OANDA you can expand your trading horizons with international share CFDs and trade over 1,500 of the biggest names in the US, UK and EU.

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The key differences between spread betting and CFD trading

The key differences to focus on between both these types of trading are on tax and availability:

	Spread betting	CFDs
Tax exemption	No capital gains tax and stamp duty^*	No stamp duty
Availability	UK and Ireland only	Everywhere except the US

^*All profits made in spread betting are exempt from UK Capital Gains Tax and UK stamp duty. UK and Irish tax laws are subject to change and individual circumstances may vary.

Should you choose spread betting or CFD trading?

Deciding whether CFD trading or spreadbetting is best for you depends on your trading style and goals. Whether you’re an experienced trader, or looking to learn on our demo account, both spread betting and CFD trading could expand your trading horizons. Let’s get into it:

Benefits of spread betting

Tax-free.^{^} Any profits you make on spread bets are currently exempt from Capital Gains tax and stamp duty in the UK. However, it is important to remember that leverage magnifies losses just as it does profits. Usually, traders face levies on profits made from buying and selling shares, but these taxes do not currently apply to spread betting.

Spread-only costs. This is because the spread itself represents the cost of opening a spread betting position. It's important to note that tax regulations are subject to change in the UK.

^{^}All profits made in spread betting are exempt from UK Capital Gains Tax and UK stamp duty. UK and Irish tax laws are subject to change and individual circumstances may vary.

Benefits of CFDs

Buying a CFD is similar to trading the underlying market itself, which can make it more familiar than spread betting if you’re an experienced trader.

CFDs are a popular tool for hedging, where you offset risk by opening a position to offset potential losses in an existing portfolio.

Understanding the risks: Spread betting vs CFD trading

Margin and leverage

Both spread betting and CFD trading are traded through the use of margin with leverage. You take a position based on the direction in which you expect the price of the instrument to move. Margin is the funds that you need in your account in order to open a position. When you trade a position using leverage, you only need to deposit a fraction of the full value of the trade, but leverage is a double-edged sword; while leverage can magnify your profits, it equally magnifies your losses. It’s possible to lose your initial investment rapidly.

You can learn more about margin and leverage here.

If you’re a more risk adverse trader, you might want to use the stop-loss orders OANDA offers:

Standard stop-loss orders: This order will close out your trade at the best available price once the set stop value has been reached. It’s important to note that your trade might be closed out at a worse level than the stop trigger, especially when the market is in a state of high volatility.

Guaranteed stop-loss orders: A GSLO guarantees to close your trade at the exact value you have set, regardless of the underlying market conditions.

Key takeaways

While both spread betting and CFD trading are similar, there are key differences to be taken into consideration. When you’re deciding which route to trade, remember to consider these in light of your trading needs and goals.

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