CFD or Spread Bet: Which is better?
We’re always getting asked this question and we often hear things like “CFDs are what professionals use” and other misinformed statements about the difference between CFDs and Spread Bets. So here goes, we’ll try to clear this one up.
Which is better, CFD (Contracts for Difference) or Spread bet? Neither, they are both the same thing. They are the same products on the same markets from the same brokers.
And before we get lots of emails and texts, and WhatsApps screaming at us, “How can they be the same, what about tax?” I’ll attempt to explain the tax difference.
Spread Bet is a name for a CFD that gives it a tax-free wrapper by the UK Inland Revenue. Consequently, earnings in the UK for UK taxpayers from Spread Bets are tax-free unless trading is the primary income of the taxpayer (note the “unless” here, we’ll come back to this later). The Spread Bet wrapper of a CFD is a UK only product.
Ah-ha, I hear many of you shouting, “So it is different.” Nope: a Spread Bet is still a CFD they are the same products on the same markets from the same brokers. And for most traders, the Tax-Free label is actually irrelevant. And now you’re really shouting, “But I don’t want to pay tax so it must be different.”
So let’s look at the Tax basis of a CFD. In the UK, earnings from a CFD falls under capital gains. Every taxpayer can currently earn £12,000 tax-free each year. So until you earn £12,000 in Capital Gains you pay no tax. Nada. Nothing. Zilch. You also do not pay stamp duty (relevant to the UK).
So a Spread Bet (for the majority of traders) is exactly the same as a CFD in every way including tax. I hope we’ve cleared that up.
Spread bet or CFD: Which should I choose?
Spread bet and CFD margin
Up until recently all brokers around the world generally offered similar levels of leverage. And its this leverage that made spread betting and CFD trading such a popular choice. Recently, however, the UK (FCA) and European (ESMA) regulators have reduced the maximum leverage available from brokers regulated by them.
So what does this mean?
This means UK taxpayers cannot trade with large leverage using a UK broker unless they declare themselves as “professional”. Some UK traders have taken this route. (Maybe here is where that “unless” earlier in the article may become relevant.) The question we have – and it’s not been properly answered by the brokers, probably because it’s not in their interest to answer it, is: will the UK taxman start to tax “professional” traders because by declaring themselves as “professional traders” they are effectively telling the Taxman it’s their primary income? This is something we are keeping an eye on and we don’t suggest you jump into “professional” status until you have sought proper guidance. Please note this article is not tax guidance or investment advice. We are not qualified to offer either.
As you can see the difference in leverage is massive. The restrictions placed upon spread bet and CFD trading cannot be overstated.
What do these figures practically mean? Why are we making a big deal out of margin?
It means you need a massive trading account to make worthwhile returns. Let’s have a look at some examples to show you what we mean.
Say you wanted to trade the GBP/USD forex pair at £5 per pip – nothing crazy – that means you need to have a minimum of £2,100 in your account. In practice you need a great deal more as you the moment the trade goes negative you have to cover this and the margin.
Perhaps that’s not an issue for you. However, what if you want to trade the FTSE at £10 per point at the same time? That’s another £3,100 you need to have in your account.
So that’s a minimum of a £5,000 account to trade two instruments at modest sizes.
The whole point of trading at leverage is so we can use smaller sums of money, apply profitable trading strategies (Which DAX 30 trading strategies work?), and generate high % returns that other investments would have no chance of matching. If you want to make a living from spread bet or CFD trading, you will need a large account.
So why has leverage / margin been changed?
The regulators, FCA and ESMA have decided to protect traders from themselves and to a degree, that is understandable, historically nearly 85% of traders lose their deposit and the regulators claim the traders do not understand the risks. Many traders however feel that the choice to trade is theirs, they are using money they can afford and that the regulator is restricting their choice. This effectively makes spread bet and CFD trading exclusive to the already rich.
So what is our solution to reduced leverage /margin?
Our solution is choice.
As a beginner, you may choose to trade with lower leverage (20/1 or 30/1) while you develop your trading skills and trade at very small sizes. You may wish to fund a larger account. Alternatively, you may wish to trade with a smaller account and have access to higher leverage.
The point is you should have the choice.
We trade with a globally regulated broker where we have the option to get the highest leverage for your trading. This means you will not get the protection of the FCA or ESMA but you will get the protection of the global regulator. If you are trading an account with less than £10,000 then this is certainly something to consider. The broker we use and recommend is Markets.com.
And here’s the big plus point, if you open a Markets.com account through the button here and we give you FREE membership for 6 months. That’s full membership of our professional Live Trade Room and all the other benefits that comes with: our education and daily guidance plus all trade signals sent to you directly on Telegram, as well as on-going support from our trading team.
If you need any clarity on this, then please don’t hesitate to contact us on WhatsApp or Telegram below.
CFD or Spread Bet trading tips
As the UK’s premier live trade room and trading educators since 2013 we have a very good understanding of the best trading tips for CFDs and Spread bets.
Don’t be in a rush
Have a plan, treat trading like a serious business. This isn’t punting a few quid on sports betting at the weekend for fun. This is a risky environment and those who don’t take it seriously often lose as much as they care to fund their trading account with. If you have a realistic plan, it can make a world of difference to your chances of success.
Those who are willing to work hard at trading have long term plan and with it they achieve consistent profitability. If you really want help to develop your own trading business plan consider our personal mentoring service.
Protect your capital
Of course, the account never gets to large.
You choices are to either trade with a small account and accept sensible risk-management will result in smaller gains (in a monetary sense), or fund a larger account. Taking on too much risk because you ‘only have a small account’ is simply reinforcing the worst trading behaviours.
Start as you mean to go on.
There are thousands of markets, there are hundreds of hours in the month to trade. You can and should wait for the right trading opportunities to arise.
Remember it is in your hands
You also have all the developmental aspects of trading in your hands. That includes the time and effort you put in to your trading strategies (like this breakout one) which results in trading confidence. What you read, the psychological work you do and whether or not you keep a detailed trade log and screenshots are also in your hands.
You are in charge or your trading development.
Want more top tips?
How to understand risk on Markets.com
Some brokers price their products in Contracts and many traders initially have trouble understanding the value of a contact and therefore how much they are actually risking.
If you do your risk management correctly i.e. you start off by pre-defining you risk per trade – let’s say £100. And you use this figure as the maximum amount you will lose if the trade hits stop.
So how to do make sure you’re risking £100 on your trade?
Well, it’s simple. Follow these simple steps:
So what do they mean and how do I work them all out in order to make sure I am not trading too small or too big? Pounds per point / pip is much simpler.
We have you covered with a quick and simple way to work out which sizes you need for different instruments that will also encourage you to use a stop loss when entering a trade (which we always recommend you do).
Firstly (the platform here is Markets.com) we click on the advanced tab:
Then place the stop loss the trade requires:
Then adjust the contract size:
Watch how the risk in monetary terms changes. As per our earlier example, £100 of risk for for the stop size we require:
See, simple and easy and it encourages you to use a stop loss.
So why do we use Markets.com?
Markets.com offers both spread betting and CFDs, so they give you a full choice depending on your circumstances and wishes. They also offer some of the best spreads (and executions – a tight spread without a good execution means nothing) in the industry when you trade on their ‘MarketsX’ platform. This can save you a lot of money in the long run and if you’re a frequent trader.
Open a Markets.com account now and get 6 months free membership to our profitable Live Trade Room, all of our member training and personal help to help you meet your trading goals.