Understanding Spread Betting and CFDs: What’s the Difference?

Watching a horse race or racing cars or even cycling races make you a spectator, but if you see all these happening, you can actually bet on the competition that would take the chequered flag. Now imagine you had options to bet on the speed at which they’d do that and whether or not they’d be in the top 3 when they do so. While related to betting on an outcome of a race, Spread Betting and CFD Trading is more about betting on the outcome of the financial markets. Both allow you to bet on price movements without ever owning the assets, but the two are big differences. Let’s break them down using sports as a metaphor.

What is spread betting?

Spread betting is actually likened to betting on the outcome of a race; however, you predict not only who will win but also how far ahead they’ll finish. In trading, it lets you speculate whether or not the price for some asset will rise or fall, akin to stocks, commodities, or currencies. It doesn’t require buying the underlying asset but simply “betting” on the price movement.

You might bet, for example, that gold is going to go up 10 points. For every point it goes up, you win a certain amount of money. And you make money if it goes up, for instance, more than 10 points. If it goes the other way, you lose money.

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The amount you win or lose depends on how much you “bet” per point of movement in the market, making spread betting highly flexible but also risky. Just like placing a bet on a race, you don’t own the prize, you just take a chance on its outcome.

What are CFDs?

A Contract for Difference (CFD) works in a similar way to spread betting. You’re still speculating on price movements, but with CFDs, you’re entering into a contract with a broker. You don’t own the asset itself; you just agree to exchange the difference in the price from when you open the contract to when you close it.

Think of it like betting on the outcome of a race, but you’re tracking how fast that runner goes and how they are racing towards the winner’s line. So the longer the price stays away, the longer you get paid off for having opened a CFD position. While the price rises, you profit. And while it falls, you lose. That’s actually different from spread betting, because the leverage in CFDs tends to offer greater flexibility than the amounts you can invest and trade in the aforementioned assets: stocks, commodities, and even indices.

Key Differences Between Spread Betting and CFDs

Ownership:

Spread Betting: You’re only betting on price movement, not owning any asset.
CFDs: You’re trading on price differences but with a contract that tracks the asset’s performance. Like spread betting, you never own the underlying asset.

Taxation:

Spread Betting: Some countries don’t tax spread betting profits, and this may attract traders.
CFDs: In general, profit gained using CFDs is taxed and would be subjected to capital gains taxes, depending on your country of residence.

Leverage:

Both Spread Betting and CFDs: Both can be used with leverage, meaning you can control larger positions with a much smaller amount of capital, but should always use caution because the margins can erode profits as well as losses .

Market Range:

Spread Betting: Tends to be relatively narrow in scope, including the majority of equities, commodities, and indices.
CFDs: All CFDs are available across a broader market range, from equities, commodities, forex, cryptocurrencies, and much more.

Which to choose?

The choice between spread betting and Contract for Difference depends on the goals and personal preferences of each. If you want a clearer form of trade which is also tax-efficient, you probably do not mind being limited to some markets, then the spread betting is for you. But if you want wider access to assets and are okay with the contracts becoming more complex, trading CFDs may be your best shot.