Review and comparison of CFDs and Spread Betting

Trading CFDs and Spread Betting are one of the most popular ways to trade a wide range of financial instruments for UK investors.

To review the differences of CFDs and Spread Betting effectively, it is first important to note the similarities.

Both CFDs and Spread Bets are financial products which are traded on leverage. This means an investor can gain a market exposure far greater than their original deposit.

Leverage

There are obvious benefits to leverage in the ability to magnify profits, however, investors must be aware that losses are also magnified. This makes trading CFDs and Spread Bets high risk and is not suitable for all investors.

The amount of leverage an investor can use is dictated by the margin they hold the account in the form of deposits, taking into consideration any running losses or profits.

Shorting

‘Shorting’ a market allows you to make money when assets fall in value. This can be particularly useful in times of volatility or if an investor wants to ‘hedge’ existing market exposure.

Financing

The last similarity between the two products we will touch on is financing. Investors are charged a financing fee for utilising the leverage provided to them by their trading platform. This is charged on daily basis bases on the size of the position.

Spreads vs Commissions

The way that dealing platforms take their fees are a fundamental consideration for investors when weighing up the pros and cons of each product.

Spread Betting platforms create a spread between the bid and offer of the underlying market. Their charge is hidden within this spread and can vary from platform to platform. Transparency is typically high in markets such as forex and indices where spreads have set minimums.

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Things can become slightly more opaque when Spread Betting individual shares. Underlying bid/offer spreads in shares change regularly and liquidity issues mean that Spread Betting platforms may have to amend spreads dramatically in times of volatility.

To gain a better picture of the underlying market, investors can decide to trade the underlying shares by using CFDs and pay a commission, instead of a widened spread.

Direct Market Access

Many CFD platforms, including IG Markets, allow investors to deal directly into the market. With the assistance of Level 2 data, investors can gain a greater insight into the liquidity of a stock and tailor their orders accordingly. While this isn’t a golden ticket to trading success, it can enhance trading returns.

Investors pay a commission rather than a widened spread when dealing in single stock CFDs. Below is a table of leading provider’s commission rates, broken down by percentage and minimums.

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Capital Gains Tax

The main attraction to Spread Betting is the exemption from capital gains tax. CFD profits are subject to CGT whilst the Spread Betting is free from capital gains tax as it is classed as a ‘bet’ by HMRC. It is worth bearing in mind that in the same way profits are not counted towards your CGT bill, you cannot use Spread Betting loses to offset capital gains elsewhere.