CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Comparing CFDs and Spread Betting

CFDs (Contracts for Difference) and spread betting are both financial derivatives that allow traders to speculate on price movements without owning the underlying asset. However, they have distinct characteristics.

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Basic Concept

Spread Betting

You bet a specific amount of money per point on whether a market will rise or fall.

CFDs

You buy or sell contracts that represent a predetermined value in the underlying market.

Position Types for Both

Long Position

Open when you expect the price to rise

Short Position

Open when you expect the price to fall

Key Differences

Structure

CFDs involve trading standardized contracts, while spread betting is based on betting per pound on price movements in points

Taxation (in the UK)

Spread betting profits are typically tax-free, while CFD profits may be subject to capital gains tax (for further information contact your tax advisor) * Tax laws are subject to change and depend on individual circumstances.

Spread betting is for UK clients

Both methods offer leverage and the ability to trade various markets, but they differ in structure, profit calculation, and tax treatment. The choice between CFDs and spread betting often depends on individual trading preferences, tax considerations, and regulatory environment.

CFDs

Position size is determined by the number of contracts traded

Standard size 1.00 lot (1 standard lot is dependent on the instrument traded)

Forex Standard sizes: 1.00 lot = $100,000, 0.1 lots = $10,000, 0.01 lots = $1,000

FX 1.00 standard lot contract of EUR/USD is trading €100,000

Profit/loss calculated based on the difference between opening and closing prices of the contract

Forex CFD Trade Example: EUR/USD (Micro Lot)

Currency Pair: EUR/USD

Position Size: 0.01 lot (micro lot = 1,000 units)

Initial Exchange Rate: 1.2000

Pip Value: $0.10 per pip for a micro lot

Scenario 1

Price Increases by 5 Pips

1. Open a long position (buy) at 1.2000

2. Price moves up to 1.2005 (5 pip increase)

3. Close the position at 1.2005

Calculation:

• Pip movement: 1.2005 - 1.2000 = 0.0005 (5 pips)

• Profit: 5 pips × $0.10 per pip = $0.50 profits

Scenario 2

Price Decreases by 5 Pips

1. Open a long position (buy) at 1.2000

2. Price moves down to 1.1995 (5 pip decrease)

3. Close the position at 1.1995

Calculation:

• Pip movement: 1.1995 - 1.2000 = -0.0005 (5 pips)

• Loss: 5 pips × $0.10 per pip = $0.50 loss

• A 5-pip move in either direction results in a $0.50 profit or loss when trading 0.10 lot (micro lot) of EUR/USD.

Spread Betting

Position size is determined by your stake per point (pip value)

Forex standard lot sizes 1.00: £1 per point, 0.10: £0.10 per point (dependent on instrument traded)

Profit/loss calculated by multiplying your stake by the number of points moved

Forex Spread Betting Example: EUR/USD Trade Details:

Currency Pair: EUR/USD

Stake Size: £0.10 per pip

Initial Exchange Rate: 1.2000

Scenario 1

Price Increases by 5 Pips

1. Open a long position (buy) at 1.2000

2. Price moves up to 1.2005 (5 pip increase)

3. Close the position at 1.2005

Calculation:

• Pip movement: 1.2005 - 1.2000 = 0.0005 (5 pips)

• Profit: 5 pips × £0.10 per pip = £0.50 profit

Scenario 2

Price Decreases by 5 Pips

1. Open a long position (buy) at 1.2000

2. Price moves down to 1.1995 (5 pip decrease)

3. Close the position at 1.1995

Calculation:

• Pip movement: 1.1995 - 1.2000 = -0.0005 (5 pips)

• Loss: 5 pips × £0.10 per pip = £0.50 loss

• A 5-pip move in either direction results in a £0.50 profit or loss when spread betting on EUR/USD with a £0.10 per pip stake.

• The profit/loss is calculated in the currency of the stake (GBP in this case).