When you decide to trade in the UK, you have a choice: buy actual shares, use spread betting, or trade CFDs. These three approaches offer different benefits and drawbacks, and which you choose profoundly affects your taxes, costs, risk, and ability to profit. Many new traders don't understand the differences and end up in the wrong approach for their style. This guide breaks down each method, explains the costs and regulatory protections, and helps you choose the right one for your experience level and trading goals.
What Is Share Dealing: Buying Actual Shares
Share dealing is the traditional approach: you buy an actual share in a company and own it. You own a piece of BP, HSBC, or Barclays. If you buy 1,000 shares of Barclays at 280p, you've invested £2,800 and own a fractional claim on Barclays' assets and earnings.
Shares are settled in your name. You can hold them indefinitely. You're entitled to dividends and voting rights. If the company goes bankrupt, you're a shareholder in the liquidation (you lose money, but you have legal standing). This is the most straightforward, least leveraged approach.
Costs: You pay a commission per trade, typically 0.1-0.3% of the trade value (so £3-10 per £2,000 trade with a typical UK broker). You pay the bid-ask spread (the difference between the price you buy at and the price you sell at), typically 1-3 pence per share on FTSE 100 stocks.
Leverage: No leverage unless you use margin (borrowing from your broker). Most retail traders don't.
Holding Costs: No overnight funding costs, no lease fees. You own the shares.
Dividends: You receive dividends paid by the company, often reinvested or paid in cash depending on your preference.
What Is Spread Betting: UK Tax-Free Points Trading
Spread betting is unique to the UK (and a few other countries). When you place a spread bet, you're not buying shares. Instead, you're betting on the price movement of the share, measured in points. It's like betting on a football match score—you win or lose based on how many points the price moves.
Example: Barclays is trading at 280p. You place a spread bet at £10 per point, betting that Barclays rises. If it rises to 290p, you've gained 10 points × £10 = £100 profit. If it falls to 270p, you've lost 10 points × £10 = £100 loss.
Key Feature: Tax-Free Profits In the UK, spread betting profits are not subject to Capital Gains Tax (CGT). This is a massive advantage if you're profitable. A day trader making £10,000 annually on share dealing pays approximately £3,000 in taxes (assuming 20% CGT after allowances). The same profits from spread betting are tax-free. Over a decade, this difference is staggering.
Leverage: Spread betting offers leverage, typically 10:1 or even higher depending on your broker and the stock. You control £10,000 of exposure with £1,000 of capital. This amplifies gains (great when right) and losses (devastating when wrong).
Holding Costs: If you hold a position overnight, you pay overnight funding. If you're short and the company pays a dividend, you pay the dividend. These costs are small but material on longer-term positions.
Instruments: You can spread bet on virtually anything: individual stocks, indices, commodities, forex. This is more flexible than share dealing, where you're limited to direct stock purchases.
Going Short (Shorting): You can easily short a stock (bet on it falling) in spread betting. If Barclays is at 280p and you expect it to fall, you place a short spread bet at £10 per point. If it falls to 270p, you profit £100. Shorting in spread betting is treated the same as going long, which is not the case with share dealing (see below).
What Are CFDs: Contracts for Difference
A CFD is a contract between you and your broker. You agree to exchange the difference in the price of an asset from opening to closing. You don't own the underlying asset; you're entering a contract on price movement.
Example: HSBC is at 650p. You open a CFD long position of 100 shares at 650p. You deposit £200 as margin. HSBC rises to 665p. Your profit is 15p × 100 = £1,500. You close the position. The difference (£1,500) is your profit. You never owned HSBC; you profited from the price differential through the CFD contract.
Leverage: CFDs offer similar leverage to spread betting, typically 5:1 to 20:1 depending on the asset and broker regulation. You control large positions with small capital.
Costs: CFD brokers typically charge a commission (0.1-0.3%) and wider spreads than share dealing (2-5 pence per share typically, compared to 1-2 pence on direct stock purchases). Many also charge overnight holding fees if you hold positions longer than a day.
Holding Costs: If you hold overnight, you pay interest on the leveraged portion of your position. Short positions may pay dividends to the underlying stock (a cost to you). These fees vary by broker and asset.
Instruments: Like spread betting, CFDs are available on stocks, indices, commodities, and forex globally.
Going Short: Shorting in CFDs is identical to spread betting—you enter a contract and profit if prices fall.
Counterparty Risk: With CFDs, your broker is your counterparty. If you profit and want to withdraw, your broker must pay you. Most regulated CFD brokers have proper capitalisation, but there's always a small element of counterparty risk (absent with share dealing, where you own the asset outright).
Tax Implications for UK Traders
This is where the three approaches differ dramatically.
Spread Betting: Tax-Free
Spread betting profits are completely free from CGT and income tax in the UK. This is a legal tax advantage, not a loophole. A trader making £50,000 annually through spread betting pays zero capital gains tax. This is why many UK day traders prefer spread betting to CFDs.
CFDs: Capital Gains Tax (CGT)
CFD profits are treated like share dealing profits and subject to CGT. The current CGT rate in the UK is 20% (for higher rate taxpayers) after an allowance of £3,000 per year (for the 2023/24 tax year). A trader with £30,000 profit pays: (£30,000 - £3,000) × 20% = £5,400 in CGT.
Share Dealing: Capital Gains Tax (CGT)
Like CFDs, profits are subject to CGT at 20% (with the £3,000 annual allowance). Crucially, share dealing can also trigger income tax if Her Majesty's Revenue and Customs (HMRC) deems you a professional trader. The distinction is blurry. HMRC looks at frequency of trading, capital investment, and intention. A person who buys and holds stocks for years isn't a trader. A person who buys and sells daily is likely a professional trader (and might be liable for income tax, which is higher: 20-45% depending on income band).
Tax Summary:
Spread betting: 0% tax (huge advantage for profitable traders)
CFDs: 20% CGT
Share dealing: 20% CGT, or income tax if deemed professional (up to 45%)
This tax advantage makes spread betting extremely attractive for active day traders in the UK. If you're a swing trader or position trader making fewer trades annually, the tax difference is smaller.
Leverage and Margin Comparison
Share Dealing: No leverage (unless you apply for margin borrowing, which most retail traders don't). You use your own cash. Limited leverage risk, but limited profit potential from small capital.
Spread Betting: Leverage built-in, typically 5:1 to 20:1 depending on the asset and your broker's risk classification. A £1,000 deposit controls £5,000-£20,000 of notional exposure. This amplifies both profits and losses.
CFDs: Similar leverage to spread betting, 5:1 to 20:1 typically. Regulated leverage (FCA limits leverage in the UK: max 30:1 for major pairs, lower for others).
Leverage Risk Example:
You have £5,000. You trade Barclays via spread betting at 10:1 leverage. You control £50,000 of notional exposure. Barclays falls 10%. Your account is wiped out. Leverage is a double-edged sword: profits are magnified, but so are losses.
Professional advice: if you're not experienced in leverage, avoid it. Trade share dealing with your own capital first. Master position sizing and risk management. Only then consider leverage via spread betting or CFDs.
Costs: Spreads, Commissions, and Overnight Funding
Share Dealing Costs:
- Commission: 0.1-0.3% per trade (so £3-10 per £2,000 trade)
- Spread: 1-2 pence per share on FTSE 100 stocks (tight), 3-5 pence on mid-caps (wider)
- Overnight: None (you own the shares)
- Dividend: Paid to you (positive)
Total annual cost on active trading: 1-2% of capital
Spread Betting Costs:
- Commission: Built into the spread, no separate fee
- Spread: 2-4 pence per share (wider than share dealing)
- Overnight: Typically 0.5-1.5% annualised on open positions held overnight
- Dividend: You pay the dividend on short positions
- Tax: 0% (major savings vs other methods)
Total annual cost on active trading (excluding tax advantage): 2-3% of capital, but tax-free
CFD Costs:
- Commission: 0.1-0.3% (some brokers charge it separately)
- Spread: 2-5 pence per share (wider than share dealing)
- Overnight: 0.5-2% annualised on leveraged portions
- Dividend: You pay dividends on short positions
- Tax: 20% CGT on profits
Total annual cost on active trading: 3-4% of capital, plus 20% tax on net profits
Cost Example (100 trades per year, average win/loss £200, 60% win rate):
Gross profit: (60 wins × £200) - (40 losses × £200) = £12,000 - £8,000 = £4,000
Share dealing: £4,000 profit - commissions (£300-£600) = £3,400-£3,700 net profit (minus CGT or income tax: £680-£1,665)
Spread betting: £4,000 profit - costs (£400-£600) = £3,400-£3,600 net profit, tax-free
CFD: £4,000 profit - commissions (£300-£600) - costs (£400-£600) = £2,800-£3,300 net, minus 20% CGT = £2,240-£2,640 net
Spread betting wins on cost and tax.
Going Short: How Each Method Works
Share Dealing (Shorting is Difficult):
To short shares, you need to borrow them from your broker. This involves an application process, margin requirements, and borrowing fees (0.5-2% annualised on small positions). Most retail brokers don't offer stock borrowing. You'd need a professional account with a more advanced broker. Shorting is possible but complicated.
Spread Betting (Shorting is Native):
You place a short spread bet with the same ease as a long bet. No borrowing, no extra process. "Short £10 per point on Barclays" is identical in friction to going long. This is a major advantage of spread betting for traders who want to short stocks.
CFDs (Shorting is Native):
Like spread betting, shorting a CFD is as simple as going long. You open a short CFD contract with the same ease as a long contract. No stock borrowing complications.
Which Approach Suits Which Trading Style?
For Day Traders (5-20 trades per day, hold minutes to hours):
Spread betting is ideal. Tax-free profits, leverage built-in, easy shorting, tight costs. You're not holding overnight, so overnight funding is minimal. If you're consistently profitable, the tax savings alone justify it.
For Swing Traders (3-5 trades per week, hold 2-5 days):
Either spread betting or CFDs work. Spread betting still has the tax advantage. Overnight costs are material but acceptable. You need to manage stop-losses tightly (drawdowns hurt more on leverage).
For Position Traders (1-2 trades per month, hold weeks to months):
Share dealing is preferable. Overnight leverage costs compound over time. You don't need shorting (you're betting on uptrends). You reduce your tax burden (fewer trades, less likely to trigger income tax status as a professional trader). You own the assets outright, eliminating counterparty risk.
For Dividend-Focused Investors (buying and holding, quarterly income):
Share dealing only. You want the dividends. Spread betting and CFDs either pay them to you at a discount or cost you money on shorts.
For Beginners (learning, small capital, uncertain of style):
Start with share dealing. No leverage means slower losses when you make mistakes. No tax complications. Simple execution. Once you've proven consistency over 50-100 trades, consider transitioning to spread betting if you want tax advantages and shorting capability.
Regulatory Protection: FCA, Negative Balance, and Segregated Funds
Share Dealing (Highest Protection):
Your shares are held in your name and segregated from the broker's assets. If your broker goes bankrupt, your shares belong to you—the broker's creditors can't touch them. The Financial Services Compensation Scheme (FSCS) provides up to £85,000 protection if your broker is authorised but fails.
Spread Betting (Medium Protection):
Spread betting is regulated by the FCA. Your balance is typically held in a client account, segregated from the broker's funds. The FSCS covers up to £85,000. However, spread betting involves counterparty risk—your broker is your counterparty and profit depends on them honouring the contract. This risk is small with well-capitalised, regulated brokers, but it exists.
CFDs (Medium Protection):
CFD trading is strictly regulated in the UK. FCA rules require negative balance protection: if your account goes negative, your broker absorbs the loss (you don't owe money). This is a crucial protection. Your balance is segregated and protected up to £85,000 by the FSCS. However, like spread betting, counterparty risk exists.
Negative Balance Protection:
This is critical to understand. If you trade on margin and the market moves catastrophically against you faster than your stop-loss executes, you could lose more than your deposited capital. Example: You deposit £1,000, trade with 5:1 leverage (£5,000 exposure), use a stop-loss. During a market gap, your position moves against you £2,000 before your stop executes. You now owe £1,000.
With negative balance protection (FCA requirement for CFDs), your broker absorbs that £1,000 loss and closes your account. You lose your £1,000 deposit but don't owe additional money. Without protection (some overseas brokers don't offer it), you'd owe £1,000.
Always trade with FCA-regulated brokers in the UK. This ensures negative balance protection and FSCS coverage.
Choosing the Right Approach for Your Experience Level
Beginner (First 3-6 months):
Use share dealing with a small account (£2,000-£5,000). No leverage, no tax complications, simple execution. Your goal is learning and proving you can follow a trading plan. Don't worry about optimization (taxes, leverage). Focus on discipline.
Intermediate (6-12 months, proven consistency):
If you're consistently profitable and day trading frequently, transition to spread betting. The tax savings are significant. If you're swing trading less frequently, stay with share dealing (less tax liability). If you want to short, spread betting or CFDs enable it easily.
Advanced (1+ years, trading as secondary income):
Choose based on your specific situation. Day traders: spread betting (tax-free). Swing traders: spread betting or CFDs (tax matters less, shorting matters more). Position traders: share dealing (no overnight costs, dividends matter, fewer tax complications). Hedge traders (shorting as much as going long): CFDs or spread betting.
The Bottom Line: Practical Recommendation
Start with share dealing. It's simple, safe, and teaches discipline. Once you've proven you're profitable over at least 100 trades, evaluate whether spread betting's tax advantages make sense for you. The difference in profitability between a perfect setup executed via share dealing versus spread betting is often just the tax bill. If you're a profitable day trader, that tax savings justifies the transition.
Use an FCA-regulated broker regardless of which approach you choose. Negative balance protection and FSCS coverage are non-negotiable.
Key Takeaways
Share dealing is simple and safe for beginners. Spread betting offers tax-free profits for UK day traders (game-changing if profitable). CFDs provide global exposure and leverage but with taxes and higher costs. Leverage amplifies both wins and losses—respect it. Regulatory protection varies; always use FCA-regulated brokers. Choose your approach based on your trading style, capital, and experience level. Start simple, prove consistency, then optimise.