Comparison showing differences in trading leverage depending on which licence they trade under.

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?

 
Now, this is a much better question and the answer does depend on your personal circumstances. For the vast majority of account openings that are less than £20,000, then the tax issue is not something you should worry about. If you decide to open a CFD account then you can make yourself a decent profit and make decisions once you’ve started to reach your tax threshold. As we always tell people – paying tax is a nice problem to have. You can always open a Spread Bet account later.
 

Spread bet and CFD margin

 
The big issue here is actually one of the margin available, also known as leverage. This is the percentage of the real cost of a trade that the broker requires you to have in your account when you trade. This effectively multiplies the money you deposit and can significantly increase the amount you can earn from trading, it also multiplies by the same amount how much you can lose. 

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.

Comparison showing differences in trading leverage depending on which licence they trade under.

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.

 

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. 

Here are a few trading tips that we hope you find useful.

Don’t be in a rush

 
Trading, like any skill or anything that is worthwhile doing, takes time to learn and get good. Forget the ‘get rich quick’ rubbish (you didn’t ever think it was true, did you?), and prepare yourself for the challenge that lies ahead. 

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

 
One of the worst things we hear is when traders say, “I’ll start off with a small account and when it grows I’ll risk 2% per trade”.  

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.

Keep perspective

 
The is going to be here tomorrow, next week and next month. It will continue to move and present an endless amount of opportunities. The fear of missing out on the next trade,  feeling you ‘have’ to be in a trade and in the market is the source of many traders over-trading, taking poor trades and failing. 

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

 
The only thing you control in trading is when you get in the market and get out of the market. That’s it. You have no control over what the market will do once you’re in it, but that’s fine, you don’t need it to make money. 

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?

 
If you want more after reading our CFD trading tips, our ‘top 10 tips for trading success’ article is here. This will teach you about about what the professional traders do and do not do in order to succeed and remain consistently profitable. 
 

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: 

A picture showing the different names of CFD and spread bet instruments.

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:

An image showing how to adjust a CFD stop loss.

 Then adjust the contract size:

A picture showing CFD contract size adjustment.

Watch how the risk in monetary terms changes. As per our earlier example, £100 of risk for for the stop size we require: 

A picture showing CFD risk changing.

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.

An image showing the spread differences on the DAX between brokers.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.

Any questions, contact us on WhatsApp or Telgram below.

1 thought on “CFDs vs Spreadbetting – which is best?”

  1. Great advice as always.

    The tax thing is something you should only worry or care about AFTER you become profitable – if you get to a point where you are consistent and profitable and constantly make gains over a longer term, then yeah look at a more tax efficient way.

    Thanks guys.

Leave a Comment

Your email address will not be published. Required fields are marked *