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Spread betting is a simple cheap and effective way to trade the worlds financial markets. You can trade anything from stocks, FX and commodities to the average cost of houses in the UK. Most spread betting brokers also offer a sort of grey market on unlisted IPO stocks that are about to come to market too.
Financial spread betting works by customers placing a bet on a stock instead of actually buying or selling the shares. A spread betting broker will provide quotes or prices based around the actual price of the stock in the underlying market.
Spread betting versus traditional stock buying
Let’s say you wanted to buy 10,000 shares of Vodafone because you though the price was about to go up. Normal investing through a stockbroker would mean you would have to pay the full amount. Let’s say Vodafone shares are priced at £2 (200).
So with a traditional stockbroker you would have to put up £20,000 cash to buy the shares. For every pence, the stock moved you would make or lose £100. If the stock goes to zero you lose your £20,000. If the stock goes to 500 you make £30,000. You are charged commission and stamp duty as well as custody fees and a levy to sell the shares.
With spread betting to get the same exposure of 10,000 shares on Vodafone if thee stock is trading at 200 you place a bet of £100 per point. 10,000 shares is equal to a £100 per pence move.
The advantage here is that as it is a bet you only need to put up margin, not the entire value of the trade. the spread betting broker will determine that as Vodafone is a big company and not particularly volatile a margin rate of 5% is applied. So you only need to put up 5% of the value (£20,000 x 5% = £1,000). So with £1,000 you can have the same exposure as buying £20,000 worth of stock.
The disadvantage is that if it goes to zero you lose £20,000, £19,000 more than your initial deposit. that is the danger of trading on margin.
Going short and profiting from stocks goes down
As you are placing a bet, you can also bet on the price of stocks going down. Looking at the same Vodafone trade, if you wanted to bet £100 per point short they you make £100 every time the stock goes down.
The disadvantage here is that if the stock goes to zero you make £20,000 but there is no limit to how high a share price can go so in theory your losses are unlimited!
What are the risks of spread betting?
It’s important to fully understand the risks of spread betting. There is potential to lose all your money rather quickly because you are trading on leverage. However, because of recent regulatory (as explained here by David Cheetham from XTB) retail traders can no longer lose more than their account balance.
Spreadex has also put together a handy guide about the changes…
Tax Free Profits!*
Because spread betting is structured as a bet rather than an investment there are currently no taxes too be paid on profits. *Obviously the law can change at any moment, but this is one of the major attractions. It means that traders don’t have to worry about tax declarations or giving up a percentage of their profits.
The disadvantage here is the if you lose money you cannot offset it agains the capital gains from profitable investments.
- The Potential Risks
- Making A First Trade
- Positive Thinking – Going Long
- Going Short – Winning A Trade From A Falling Market
- 5 Ways To Make A Profit From The Market
- Spread Betting’s Hidden Costs
- Choosing The Right Provider Of Spread Betting Services
- Glossary Of Spread Betting Terms
- Compare spread betting brokers, features, accounts and markets
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.