If you’re thinking about leveraged trading, spread betting and CFD trading are two popular choices. While they share some features, understanding the key differences can help you decide which suits your needs best.
Spread betting lets you speculate on whether a market’s price will rise or fall by betting a certain amount per point of movement. One major advantage is that any profits you make are typically tax-free in the UK. You don’t own the underlying asset, and brokers charge no commissions, only the spread, which is the difference between the buying and selling price.
CFD trading, on the other hand, involves buying or selling contracts for difference based on the price movements of an underlying asset. Unlike spread betting, CFDs are subject to capital gains tax, but they offer more flexibility in terms of trade sizes and stop-loss options. Like spread betting, you don’t own the asset, but CFDs often allow access to a wider range of markets and have slightly different fee structures, which can include commissions on shares.
Both methods allow you to go long (to buy) or short (to sell), using leverage to amplify your exposure, and trade across various markets such as forex, indices, stocks, and commodities. However, your choice may depend on factors such as tax treatment, market access, trading costs, spreads and personal preferences.
While spread betting is generally tax-free, for most casual traders the difference between it and CFD trading is minimal. That’s because if your profits are small, they usually fall within the capital gains tax allowance (up to £3,000), meaning you won’t owe tax on CFD gains anyway. It’s only when trading large volumes or making significant profits that tax differences become more relevant.
Ultimately, both spread betting and CFD trading are effective tools for leveraged trading, but knowing how they differ will help you pick the one that fits your goals.