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How is spread betting different from CFD trading?

How is spread betting different from CFD trading?
Asked by
Jane Goodwin categorie-icon time-icon5 months ago
1 Answer Answer Question

Justin Freeman
Answered time-icon5 months ago

In CFD and Spread betting positions are taken on whether a financial instrument is going to go up or down in price. The direction that actually occurs will determine whether you make a loss or a profit, the size of which will be a function of the size of the stake you placed.

Some broker platforms such as IG and City Index offer both CFD trading and Spread betting at the same place, which suggests there must be some kind of a differential, and there is.

Part of the difference is the mechanism of booking a trade. If you’re trading a CFD you’ll denote the amount of that instrument you want to buy or sell; for example, if you are buying a CFD position in Vodafone (VOD:LN) then you may enter you want to buy 10,000 shares. You can buy a long position or sell short but will see yourself as holding the position of 10,000 VOD. When spread betting you can also go long or sell short, but trading involves applying a stake size which will have a minimum size of one. Instead of buying Vodafone you’ll place a stake on whether the price of Vodafone is going to go up or down. If your account is denominated in GBP and your stake size is 3, then for each point that price moves you will make a loss/gain of £3. If your stake size is 5, then each point would see a £5 P&L move.

Some account holders will find spread betting and CFD trading involves incurring lower tax charges on trading activity. The costs of both are often compared to the costs of buying UK equities outright. A UK resident buying 10,000 shares of Vodafone in ordinary equity form will pay a stamp duty charge (Stamp Duty Reserve Tax) of 0.5% of the total consideration of the trade.

Some traders operate in both markets, some favor one over the other. Choosing one over the other  can largely come down to personal preference. It’s very important that whichever you choose, you consider all the guidance offered on how to manage the many risks involved.

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