Spread bets and Contracts For Difference (CFDs) are both bets on a company’s share price without buying the share itself. It’s possible to short shares with both and it’s possible to get exaggerated returns.

There are also some tax advantages, for example there is no stamp duty to pay. The markets, sectors and indices are the same, or almost the same. Most of the dealing terms are the same and there is an ability to place stop losses. So why are they different?

There are a number of differences, but the crucial difference is that Contracts For Difference are a contract between two parties, while a spread bet is a contract between a buyer (the better) and the exchange (the seller). For example although spread bets are supposed to mirror the prices on the exchange, it is possible for the exchange to set them differently (although an exchange in the UK would get in trouble for this). CFDs are also able to be held indefinitely, although there is a time charge for every day a CFD is open.

Spread bets and CFDs also differ in the way they grew up. Spread bets were always aimed at consumers, and so they were sold as “bets” and so they tend to be quoted in sterling on just about every bet. A Contract For Difference were set up as derivatives for traders and so will always quote in the currency of the underlying commodity, so if it is crude oil it will quote in dollars, so it’s to some extent a bet on the currency as well.

CFDs are more like shares in general, and it is helpful to think of the differences in this way. Whereas dividends do not count at all with spread bets, they are generally added on to “long” CFDs and taken off “short” CFDs. Although CFDs don’t pay stamp duty, like spread bets, they do pay capital gains tax, like shares. CFDs are also allowed to trade on a margin (although this can be a mixed blessing) and it is also possible to open an advisory account with a stockbroker.

CFDs and Spread bets do very similar things, but they grew up in different surroundings and this is reflected in the way in which they operate.