CFDs vs Spreadbetting – which is best?

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?

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?

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. 

Markets.com has licenses in the UK, Europe, and Globally. They are one of the few brokers that give you the option to choose to be regulated outside of the UK. They also offer MT4. 

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.