Financial Spread Betting
Financial spread betting is quite similar to standard financial trading with a few key differences, one being that you are effectively betting on whether the market will go up or down.
You basically bet on the price movements of financial assets like commodities, indices, currencies, shares and interest rates.
As with sports spread betting, financial spread betting companies will offer customers a spread on financial instruments. You can either choose to ‘buy’ at the top of the spread if you think the price will rise, or ‘sell’ at the bottom of the spread if you think the price will fall.
Your profit or loss at the end of the trade will depend on your buy or sell price, the price of the asset, and the size of your stake
Example: You wish to trade a share priced at £1 or 100p, with the spread at ’99p – 101p’.
You decide to buy at 101p for ‘£10 a point’.
If the share fell to 50p with the spread at ’49p – 51p’ – closing your trade at 49p would mean a £520 loss. (101 price at which you bought minus the closing price of 49 = 52. £10 x 52 = -£520).
If the share rose to 150p with the spread at ‘149p-151p’ – closing your trade at 149p would yield a £480 profit. (149 closing trade / price minus the price at which you brought 101 = 48. £10 x 48 = £480).
See diagram below:
Note: In order to close your trade you need to execute the opposite action of your initial trade. So buying initially will always mean selling to close your trade and vice-versa.
Some of the advantages of financial spread betting over traditional trading are:
Advantages of Spread Betting
1. Falling and rising markets:
With traditional stock market trading you need the value of the shares you have purchased to rise in order to realise a profit. With financial spread betting however, you can make a profit form rising and falling instruments and markets. The ‘spread set up’ of financial spread betting also makes this process very easy to understand.
You can, depending on your circumstances, increase your potential returns on your investment through leveraging. Leveraging often involves taking out larger positions / exposures for a relatively small financial outlay.
3. No Capital Gains Tax
At the time of writing, there is no Capital Gains Tax on any profits that you make spread betting. Of course losses can’t be offset against other profits. Your tax situation may differ if you are not a UK resident / citizen.
4. No Stamp Duty
If you purchase UK shares, you currently have to pay tax / Stamp Duty on the transaction of 0.5%. At the time of writing financial spread betting is not subject to Stamp Duty. Again, tax requirements depend on individual circumstances.
5. No Fees
The only fee you will face with financial spread betting is the spread itself. You don’t have to pay any broker or accountant fees. There is also a small fee built in if you want to roll over a ‘daily’ position to the ‘next day’. Yet longer term markets like ‘Futures’ do not generally incur such a fee.
6. No Deposit Minimum
Standard brokerage accounts may require you to hold a minimum deposit. Spread betting accounts generally don’t require minimum deposits, contracts or joining fees.
7. Credit Accounts
Depending on circumstances, credit accounts are offered to customers, which means that you get the chance to trade without ever depositing money into your account. If you are a good trader, it is entirely possible that you will never have to part with a penny of your own cash.
8. Cash Release
There are a few scenarios where you can release cash. For instance, if you have a number of fully paid up stocks, then you could convert them into a spread bet and release your cash bar a small margin payment. (Opening commission fee and rollover fee would apply as applicable)
You can use spread betting as an effective hedging tool. If for example you were concerned about a fall in value of a particular share, then you could place a ‘sell’ bet on that share, which would cover you if the share fell in value. This would negate the need to give up the actual share and perhaps attract Capital Gains Tax on your investment.
These days, most brokers offer mobile trading. Financial spread betting is no different, with state of the art mobile platforms for laptop, smartphone and tablet for both ios and Android.
A quick summary:
- A very exciting way to trade financial instruments.
- Very simple to execute your trades.
- It is very easy to take advantage of both rising and falling markets.
- In the UK at least, profits on betting are tax free, so you will not pay capital gains tax on your profits.
- You can leverage and trade on credit with many financial spread betting firms.
- No commission on trades. Just the dealing spread.
- You can manage your risk with different types of stop loss.
- Financial Spread Betting can be used as a hedging tool.
- If you fully paid up stock you can convert them into a spread bet and release your cash.
- Release cash.
- A great hedging tool.
One of our favourite financial spread betting firms is Spreadex. They are also one of the few firms to offer financial and sports spread betting.