A UK trader who wants exposure to the FTSE 100 at 8,200 can do it two ways. They can place a spread bet at £5 per point, or open a CFD for the equivalent notional size. On screen, the two positions look almost identical. The differences that matter turn up later: on the monthly statement, in the tax return, and at 11pm when a market gaps and your margin requirement moves.

Both products are legal, both are sold by FCA-regulated firms, and both can wipe out an account quickly if you size them badly. Choosing between them is really about cost structure, tax treatment and the way you trade.

What the two products share

Neither is an investment in the underlying asset. A spread bet and a CFD are both derivatives: you agree a contract with the firm, settle the difference in cash, and never take delivery of shares, currency or barrels of oil. That single fact drives most of the tax position for both.

Both are margined. You post a fraction of the position's notional value, and the firm can require more money if the market moves against you or close the position if your account falls below its stop-out level. Both charge overnight financing on anything held past the daily cut-off, and both give retail clients negative balance protection, meaning you cannot lose more than your account balance. You can still lose all of it.

The FCA leverage caps apply equally to both: 30:1 on major currency pairs, 20:1 on major indices and gold, 10:1 on other commodities, 5:1 on individual shares and 2:1 on cryptoassets. Firm-level rules on margin calls and stop-outs vary, so read the specific terms rather than assuming the headline numbers mean the same thing everywhere.

Costs: where the pricing models diverge

Spread betting is usually commission-free. The firm's charge sits inside the spread, and your stake is expressed in pounds per point. On a share spread bet, that wider spread is the price you pay for simplicity.

CFDs often work the other way, particularly on single shares: a tighter spread plus a separate commission based on the number of shares or the trade value. On indices and FX, the pricing between the two is frequently close enough that the difference is a rounding error. On share positions, it can be meaningful.

Everything else is broadly mirrored. Overnight financing is charged on the full notional exposure of both, usually a benchmark rate plus a markup, and it is debited daily. Dividend adjustments are credited on long positions and debited on shorts in both products. If your account is in sterling and you trade US markets, currency conversion costs apply in both cases.

Worth comparing before you open anything:

• The spread on the market you trade most, checked live rather than from a marketing page.
• Commission, if any, and how it is calculated.
• Overnight financing rate and the time it is applied.
• Currency conversion charge on non-sterling positions.
• Minimum stake or contract size, and whether you can trade fractional sizes.
• Inactivity fees or platform charges, which quietly erode small accounts.

A useful habit: hold a position in a demo account for a week in each product and total the costs. On short holds the spread dominates. On anything held for weeks, financing usually becomes the bigger number.

Tax treatment: the real dividing line

For UK individuals, spread betting profits are generally exempt from capital gains tax and stamp duty, provided you are not trading as a business or relying on it as your main income. That exemption is the main reason spread betting is popular here. It has a sting: spread betting losses cannot be offset against other capital gains.

CFDs do not get that exemption. Gains are chargeable to capital gains tax, which means they are reportable and the annual exempt amount applies. The trade-off is that CFD losses can generally be offset against other capital gains, subject to the usual rules, and carried forward in some circumstances. If you expect to be net profitable over a tax year, that offsetting ability has real value.

Two further points. Dividend adjustments paid on CFD positions may be treated as income rather than capital, so keep records and check the position with a tax adviser. And if your activity is large enough to look like a trade, HMRC can treat spread betting profits as taxable income too. Whether you are trading or investing is a question of fact, not something a broker's terms can settle.

Tax rules change and individual circumstances differ, so take professional advice before assuming either treatment applies to you. Neither product can be held inside an ISA or a SIPP, so there is no wrapper available to shelter the gains.

Which one tends to suit which trader

Spread betting often fits

UK-based individuals trading short-term, directional positions on indices, FX and commodities who value a simple tax position and no commission line. It also suits traders who dislike paperwork and are comfortable with the wider spread as the price of that simplicity. If you are likely to be a net loser over the year, the inability to offset losses matters less.

CFDs often fit

Traders who want tighter share pricing with a commission model, who expect net gains and want offsettable losses, or who trade through a limited company. Non-UK residents get no benefit from the spread betting exemption, so the comparison is usually about pricing alone. CFDs also tend to offer finer position sizing on shares and indices.

A practical routine before you commit

Pick the one market you know best and run both products on it in demo mode for a month. Log every trade: entry spread, exit spread, commission, financing, and the net result. Then compare the totals side by side.

If the two are within a few pounds across twenty trades, let tax and administrative effort decide. If one is clearly cheaper, ask whether the tax difference is large enough to override it — a trader who never holds overnight may barely notice financing, while someone holding for weeks will.

Whichever route you take, treat margin as a risk decision rather than a convenience. Decide your maximum loss per trade before you open it, keep position size well below what the margin requirement allows, and never fund an account with money you need for anything else. Leverage does not change whether your view is right; it only changes how quickly you find out.