Should you spread bet or use CFDs?

Spread betters have an alternative available that does a similar job the contract for difference, or CFD. But how to do you pick between the two?

First off, we'll deal with the similarities. Like a spread bet, a CFD is a derivative. That means you don't trade the underlying share, currency or commodity direct but rather a contract priced relative to it. In both cases the contract will move up or down as the underlying asset does, and you can place up and down bets to make money. In both cases there is no stamp duty to pay up front.

However, to consider them as identical is a mistake. First off, CFDs attract capital gains tax (CGT) if you make a profit. Spread bets don't. But that also means that spread bets cannot create losses for tax purposes (which reduce future gains and therefore CGT) whereas CFDs do.

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Then there's the contract size. With a spread bet you might bet say £10 per point, where a point is a 1p movement in the share price. With a CFD on the other hand you specify a number of contracts, so 1,000 Barclays CFDs is the equivalent of buying 1,000 Barclays shares but using a derivative instead. Minimum contract sizes are usually larger for CFDs, making them better suited to professional investors.

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In terms of charges, spread betters suffer the difference between the bid and offer price whereas a CFD broker will typically charge a commission, a bit like buying shares. Also most spread bets are denominated in sterling via a UK broker, whereas CFDs are usually quoted in the underlying currency of the market being traded.

Finally CFDs are longer dated and therefore can make placing a longer-term bet more cost effective than constantly rolling over shorter duration spread bets. Set against this however, you will typically incur a small daily funding charge on a CFD (interest). This will impact the overall cost of the trade if you leave a position open for several months.

Overall, given the significant tax advantages of spread bets, they are a better choice for most retail investors.