Benefits And Advantages

Benefits: Advantages of Spread Betting
Written by David

Spreadbets and CFDs: The Trading Vehicle Of Choice

It’s official! Spreadbets and CFDs have now been recognized as the best vehicle to use for day trading. A spokesman said that when all the positive aspects of using such trading products were figured in, the contracts outperformed alternatives and are rapidly being adopted as the way to leverage trading profits with minimal capital.

Financial Spread Betting Benefits

He cited the flexibility in size of contract, and the use of one provider for most if not all of the trading needs, including equities, commodities, and other financial areas. CFDs and spreadbets are competitive with any other financial instrument with regard to leverage, and the possible downside of daily interest was not a significant factor to people who are active in the trading market.

Under UK law, there is no stamp duty or capital gains tax on an individual’s betting profits although betting duty has to be paid by the spread betting provider (at 3% on ‘net stake receipts’ basically gross profits from bookmaking). Spread betting can be an easy and cost effective way to trade as the customer does not pay fees (unlike say equity trading). This is because the spread betting provider makes its money from the difference between the bid and offer prices. Spread betting also lets the customer speculate on a whole range of markets that would otherwise be difficult to access. It also allows trading on markets with a different currency while not incurring exchange rate risk. For instance utilising a spreadbet to acquire exposure to say, the Dow Jones means that you can bet in pounds per point, removing the exchange-rate risk in the process – something well worth doing with the present wild currency movements.

7 Ways Spread Betting Can Be An Investment Tool

Okay, there’s a chance you’re sat there thinking: “What can I use spread betting for?” Besides making intelligent bets on market movements, you can make spread betting part of your overall investment portfolio with several smart strategies.

– Use spread betting to… participate in desirable IPOs

Consider an internet sensation like Google going public. You can be assured of its success during its promotion days only! Obviously the IPO would be very much hyped in the media etc and will be oversubscribed. If you’re a small investor, you probably won’t be able to benefit from such IPOs – your capital wouldn’t allow you to purchase the shares.

But with spread betting, you can take advantage of the spread bets available in the grey market, before public trading of the share starts. This can be done for most of the new share issues. For an instance, Cantor Index was running a market on the closing price of Cambridge Silicon Radio on its first day of trading. Sometimes, instead of buying the shares, the safer way is to invest in a spread bet.

Note: On rare occasions, a company may decide to double the number of shares it issues at short notice and this could be a threat for a conventional investor. To protect yourself against these scenarios, it’s advisable to take out a spread bet on the market capitalization of the company on the first day after going public.

– Use spread betting to… trade with ease anytime from anywhere

You need not sit before your computer all throughout the day to trade spreads. With PDAs and iPhones, you can receive real-time quotes and execute trades on the go.

– Use spread betting to… bet on mergers and acquisitions

When Indian car manufacturer Tata made a bid for Jaguar in early June, shares in Tata came under pressure, while shares in Jaguar surged. People felt that Tata would be drawn into a biding war and would finally overpay and acquire it. This might bring the balance sheet of Tata into problems.

Spread betting allows you to trade in and out quickly and cheaply, taking advantage of these fairly predictable situations.

– Use spread betting to.. .day trade

In the UK, a stamp duty of 0.5 per cent is liable every time you buy a share. So being a day trader you need to spend lot money paying commissions to the brokerage houses and stamp duties to the government. Spread betting is free from stamp duties and capital gains tax, and makes day trading more economical.

– Use spread betting to… gain exposure to multiple markets in a single trade

Some spread betting companies create spreads which combine indices in different countries. In that way you can get exposure to markets of both countries with one trade.

– Use spread betting to… speculate on the price of Crude Oil

Since many companies offer spread bets on crude oil now you can take positions from almost anywhere in the world. Even though it is one of the most volatile commodities in the world – with thousands of traders trying to make money on it – you can trade and place orders in seconds if you’re confident of your judgement.

– Use spread betting to… maintain diversity

Without having to build a huge portfolio comprising shares from different sectors, you can take spread bets on the automobile sector, and move in and out of pharmaceuticals, energy, banking or infrastructure as you wish.

financial spread betting

The advantages of spread betting are as follows:

  • Income and Capital Gains Tax-Free. Any gains you make are free from UK capital gains and income tax.
  • No Commission or Stamp Duty to pay. No direct commission or brokerage fees are payable, you only pay the bid-offer spread.
  • Trade many markets and Instruments from one account. A single account provides you access to global markets including shares, indices, currency pairs, commodities, interest rates and options. Ever fancied trying to catch one of those big moves in a USA technology stock like Google or Apple? Or perhaps you’d like to get exposure to the racy India 50 stock index? Spread betting in this respect opens up a whole new world of financial markets including those in the USA, Europe, Australia and Asia which were not accessible to UK traders before.
  • Ability to go Long or Short i.e. Buy in anticipation of a rise or sell in anticipation of a fall. The ability to profit from a falling as well as a rising market is a key advantage of this trading product.
  • Trade on Margin i.e. you only deposit a % of the value of the trade.
  • Profits are theoretically unlimited. The ‘more right’ you are, the more you will gain.
  • Out of Hours trading. You can ‘deal’ after-hours or when traditional markets are closed. In practice you can deal 24-hours a day for the main indices. Even at 3a.m! Most stockbrokers don’t take kindly to being woken at this time of the morning!
  • You can spreadbet for very small stakes and spread betting is great for opening and closing smaller position sizes.
  • No exposure to currency risk. This means that you don’t have to worry about currency movements when you deal in overseas shares. You are able to spreadbet on a wide range of financial markets or products on one platform using one currency – £, $ or €.
  • Spread betting gives you control. That means -:
    1. Set your individual market entry and exit points
    2. Manage your own positions
    3. Set you own Stop Levels
  • Immediate execution of your orders at the quoted price.
  • Different Order Types e.g. Daily, Quarterly.
  • The availability of Guaranteed Stop Orders.
  • Internet trading with customisable trading screens.
  • Complete documentation suites including:
    1. Bet confirmations
    2. Current Positions
    3. Daily and Monthly Statements
  • You can get a credit account, depending on your experience and credit worthiness. This saves the hassle of sending them a cheque each time you make a bet.
  • Finally, there is no commission to pay! They make their money on the ‘spread’ of their quotation.

Nobody likes to pay taxes. A key advantage of financial spread betting is that profits are tax-free unlike other forms of trading such as shares dealing, options, futures, covered warrants or forex apart. That’s right; profits from spread betting are free from income tax, irrespective of the extent of your gains.

Apart from this being a huge benefit in itself just imagine the ‘savings’ in time and paperwork which can be a nightmare to deal with. Of course this only applies if you actually make profits and likewise you won’t be able to offset spread betting losses against taxes but it is still a nice position to be in.

Compare that to shares dealing; if you went to a traditional broker you would have to pay stamp duty on the shares you have bought as well as broker charges plus you will also have to pay Capital Gains Tax should the value of your investment increase (isn’t that why you bought the shares in the first place!?). Spread betting on the other hand is completely exempt from CGT tax; as you don’t own the stocks, there is no stamp duty to pay. Most spread betting providers don’t charge direct commissions for trades; instead they widen the bid-offer spread a little.

Incidentally, there are other non-obvious advantages to spread betting: since you are not buying a physical asset you do not have to worry about custody charges. In years gone by, when someone acquired a share, they would also get a share certificate, proofing their title of ownership of that share. Nowadays, stock brokers still have to hold such shares for invested shareholders, but they normally charge investors a small fee for this service. Obviously, since spread bettors are not trading physical shares, this isn’t even an issue and there are no custody charges to worry about. You are simply speculating on a financial instrument which mirrors the price of an underlying asset but you don’t have to pay a broker for safe keeping.

Stock trading raises the usual conundrum for anyone managing a portfolio to pay bills in Sterling – do you take 1.58 as quite a reasonable area to buy dollar securities? It adds a new layer of problems. The best companies are in the States, but you’re always at the mercy of currency movements. Take mid 2009 for instance, for the family account buying the Dow seemed quite wise – the move from $1.40 to $1.70 in sterling took a big chunk of profit away. In early 2008, buying the Dow would cost £6375. After the crash it would be worth £4814, but still have 75% of your starting capital. Buying it in dollars, you’d only have 50% of your starting capital by March 2009. A huge difference just based on the currency used. You see where we are getting here? Spread betting does not come with any currency exposure so you don’t have to constantly niggle about foreign exchange fluctuations when dealing in overseas stocks.

Basically if you set your bets at exactly the same level you would buy shares then buying shares makes no sense. You have capital gains, less real time information – you never know how much you really own until you place a sell order, you generally have less features, and you obviously tie up far more money. With a sensible approach and trades planned exactly as you would with shares there really is no argument in favour of holding shares over spread betting especially for short-term trading.

The workings of financial spread betting are also very simple to understand – you simply have to bet on whether a market is going to rise or fall and then once you have a decided on a direction you can proceed to place either an ‘up’ (go long) or ‘down’ bet (go short).


About the author


I first cut my teeth in the Square Mile in the winter of 2002. I was young, fresh-faced and straight out of university; keen but maybe a little naïve about the way the investment world really worked… A few years ago I discover a whole new world of opportunity: spread betting on the financial markets.

Leave a Comment