CFD v Spread Betting: Which Trading Method Suits You Best in 2025?
If you’re trading in the UK, you’ve probably heard the debate around these CFDs and spread betting.
They’re like cousins in the trading world, offering leveraged access to the markets without owning the underlying asset.
You can trade rising and falling markets in countless asset classes and use margin to amplify positions.
But dig a little deeper, and key differences emerge (capital gains tax rules being the most significant).
All in all, spread betting profits are tax-free for UK traders, (yipee!) which is quite tempting…. But before jumping in, this tax law perk might come at the cost of pricing transparency and direct market access.
Meanwhile, trading CFDs can offer this advantage, along with tighter spreads and other benefits, but with the downside of being less tax-efficient.
Let’s walk through both of these financial instruments to help you figure out the most suitable vehicle.
Table of Contents
Key Takeaways
Both CFDs and spread betting are leveraged derivatives with no physical ownership; you simply trade the price movements.
Financial spread betting profits are tax-free in the UK. CFD profits? Not so lucky; many traders have to pay capital gains tax on profits.
Spread betting uses a simple stake-per-point format, and all profit and loss is calculated in GBP £’s.
CFD accounts are global and often include access to direct market pricing models, while spread betting is mostly limited to the UK and Ireland.
Traders can sometimes use losses in CFDs to reduce other capital gains liabilities, which isn’t an option for spread betting.
About CFD Trading
Trading a contract for difference (or CFD) is simply derivative trading where you agree to exchange the difference in an asset’s price from the opening to closing time of a trade.
There are no shares, no gold bars, no bundles of wheat or other underlying assets that need to be owned.
Let’s say you’re bullish on the euro or EUR/USD at 1.50.
Instead of owning actual euros, a simple long position on a charting platform would be enough to gain some market exposure.
If the price rose from 1.600 to 1.630 (30 pips) and your position size was a standard lot ($10 per pip), you would have a running profit of $300.
On the other hand, there would be a running loss of $300 if the market moved the other way.
The extent of the wins and losses is dependent on the amount of leverage, which amplifies both equally (the same applies towards spread bets).
How Spread Betting Works
Spread betting is another leveraged financial derivative which is based on a wager-style of speculating on different traded markets.
It has its roots in sports betting, where the ‘point spread’ represents the margin of loss or victory for a particular sporting event.
The financial spread betting we know today was pioneered in the early 70s by the broker IG.
Rather than trading contracts of a certain CFD, a ‘bet’ occurs on the market direction using a per-point system.
For instance, if you staked £10 per point on a FTSE 100 long position and the market price rose 50 points from 9000 to 9050, £500 would be the unrealised gain (or loss if there was an unfavourable price movement of the same extent).
This demonstrates the simplicity of spread bets compared to forex CFDs or other CFDs.
Furthermore, being a UK-focused industry, spread bets are often GBP-denominated.
However, the most attractive part compared to traditional financial markets or CFDs is that spread betting profits are tax-free in the United Kingdom
Similarities Between CFDs and Spread Betting
Aside from the key differences (more on those in a minute), these two products share a lot under the bonnet:
Both are leveraged. It is generally up to 1:30 for those in the UK trading with an FCA-regulated firm (it can be higher for traders elsewhere globally trading CFDs). ‘Professional traders’ can access more leverage under special conditions.
Both allow traders to speculate on rising and falling markets.
Both offer trading in forex, indices, shares, commodities, bonds and other financial instruments.
Neither product incurs stamp duty (since there’s no tangible asset ownership).
Both generally provide negative balance protection for retail clients trading with an FCA regulated firm (so you shouldn’t lose more than your account balance).
Risk management tools like stop losses, take profits, and sometimes guaranteed stops are available on both. Traders can also choose between market orders and limit or pending orders.
Bottom line? The mechanics are nearly identical when it comes to trade setup and risk control.
Now here are the differences.
Tax Treatment and Regulation
The tax treatment and level of regulation are the most significant when comparing spread betting and CFD trading.
Spread betting incurs no tax, while CFD traders pay capital gains tax above a certain tax bracket or annual allowance.
Despite this, losses on CFDs can be offset against other capital gains, which isn’t possible with spread betting.
HMRC (the UK’s tax authority) has classified spread betting as ‘gambling’ or ‘betting (which is naturally tax-free), not investing.
Such a legal distinction has kept it outside financial trading tax treatment for a very long time.
This is interesting because spread betting providers are regulated by the Financial Conduct Authority, the same authority that oversees countless CFD providers.
Speaking of regulation, it’s fair to say that there would be far fewer unregulated spread bet brokers compared to those in CFD trading. (never trade with an unregulated firm!)
Spread betting is still quite limited to the United Kingdom and, hence, boasts a significantly smaller market share.
Meanwhile, CFDs are far more popular, but this also means that regulation can be less strict or non-existent in many countries.
Trading Mechanics
A point system applies to price movement in spread betting, more specifically, a British pound per point (£pp). In some cases, the measurement of an asset’s price may be a penny or a hundredth of a penny.
Meanwhile, there are various methods for quantifying the price movement in CFDs.
Pips are universal in currency fluctuations; points are used in crypto, major stock indices, options, and stocks; ticks prevail in futures, commodities and bonds.
Another differentiator is that we convey positions as ‘bet sizes’ spread bets, while ‘lot sizes’ are generally the common term.
We also have to look at how leverage is expressed.
Traders use percentages in financial spread betting, while ratios are often the standard when you trade CFDs.
For instance, a 2% margin percentage is 1:50; the formula is 1 / percentage X 100 (or 100 / leverage ratio for the inverse)
Finally, no expiry times apply when trading CFDs (the exception being some futures CFDs). This means you can hold a trade indefinitely.
Spread bets used to have fixed expiration times ranging from a day to several months or longer, but now cash products are the most popular. These do not expire but do carry an overnight holding charge.
Brokerage Model
There is no direct market access with spread betting. As it is derivative trading, companies offer a ‘replica’ of the underlying asset.
Among other things, it means that they can present prices which mirror (but not exactly) the real asset’s price and act as a counterparty in every trade.
This model is often referred to as being a ‘market maker.’
Meanwhile, many CFD brokers promote themselves as DMA or direct market access.
Alternatively, it could be STP or straight through processing. The concept is that orders get sent to other senior liquidity providers who are the originators of the traded asset in question.
In my years of experience, very few do it this way. So, it’s best to assume that some ‘internal market making’ happens, which is fine provided the broker is regulated and reputable.
Active Trading Costs
CFDs incur spreads (the difference between the buy and sell prices quoted by a broker) and sometimes a commission.
Meanwhile, only the spread applies with spread betting (but technically, there is a commission in the spread).
However, most spread betting and CFD trading is fairly reasonable in the fees department.
Still, traders should note that swaps or overnight funding apply to each financial derivative if trading the cash product.
Final Thoughts: Which Financial Instrument Is Better?
All traders want to find the easiest trading style or strategy possible with the highest potential profits.
However, the level of complexity between spread betting vs CFDs is fairly consistent.
So, we’d have to consider other factors that would sway one person from CFDs to spread betting or vice versa.
By and large, spread betting suits UK traders who don’t wish to pay capital gains tax and prefer the simpler points system.
Meanwhile, CFDs are generally tailored for traders everywhere, catering to all styles and time horizons.
Although the issue of capital gains remains, the potential to offset losses (depending on the country) against profits in other CFDs could reduce the tax bill.
So, ultimately, there is no absolute ‘better’; it’s about what’s fit for purpose.
If you want to learn more, check out my deep dive on all things tax and spread betting. I cite links from HMRC and share all my findings.