Spread betting on shares allows you to profit from movements in global stocks without owning the physical shares. For short-term investors, this can be a much more affordable option than buying and selling through a broker.
There are no brokerage fees to pay and your winnings will be tax-free depending on your individual circumstance however it must be noticed that this is subject to change. Spread betting also allows you to profit when share prices fall, which can be an attractive proposition in an uncertain economic environment.
What are shares?
The word ‘shares’ is used to refer to indivisible units of capital in a company. When a business is listed on a global stock exchange, its shares are offered up to investors to purchase.
Individual share prices reflect the underlying value of the company and are measured according to a number of factors, such as profits, returns on investment and earnings per share.
Their values increase and decrease over time and are determined by supply and demand economics. If investors rush to snap up shares, their value will increase. Likewise, if investors sell in large amounts, the value will fall.
Trading of stocks and shares takes place on regulated exchanges around the world, such as the London Stock Exchange and the NYSE Euronext. NYSE Euronext is for instance home to companies with a combined market value of $ 2.4 trillion which is about twice the size of the Deutsche Börse and about three-quarters of that of the London Stock Exchange..
Shares spread betting involves betting on the movement of a provider’s prices which are derived from the prices on the world’s stock exchanges. Betting providers will offer a buy price and a sell price on any given company and the spread is the difference between these. If you believe the shares in this company are about to rise, you will buy. If you think they are set to fall, then you sell.
The amount you profit will be determined by your original bet amount and the distance the share price has moved above or below the spread. Spread betting on shares differs from ordinary trading, as you do not purchase the physical stock.
When you buy shares in a particular company, you are trusting that the price of those shares will increase over time. With spread betting, this is not necessarily the case, as you can bet on share prices falling as well. Shares spread betting is therefore a popular activity in an uncertain economy, when share prices are volatile.
Thing is why should you pay the full amount for a stock when you can pay between 5% to 10% using a spreadbet? Why use a traditional share trading platform offered by a house broker that only deals local UK shares when you can use a spread betting platform and spread trade global markets 24 hours a day? Why trade stocks that can only return profits when markets move up when you can use spread bets to take short positions and profit from prices rising or falling in value?
Spread betting is sometimes described as ‘share trading with bells and whistles’. This is because most of what you know about stocks applies to, and can be used to trade spreadbets. Compared to traditional buying of shares, spreadbetting is in fact almost the same except that when you a spreadbet you don’t own the underlying share. If you trade a spreadbet on BP’s share price for instance, you are essentially betting that the price of BP will go up or down. You don’t own BP’s shares, you are only speculating on their price going up or down.
The prices of spreadbets moves as the actual stock price moves, e.g. if share XYZ is worth £5.00, a share spread bet on XYZ on ABC will usually also be £5.00. Imagine that BP’s share price has fallen by 10 per cent in the last month. You reckon the move looks overdone and think the price is likely to recover soon. So, you go out and buy BP’s shares. Just as you expected, the shares then bounce 11 per cent over the next three weeks and you sell up. However, you don’t enjoy the full fruits of your trade, as you have had to pay stamp duty on the transaction, on top of brokerage costs. And your profits may be liable for tax.
Alternatively, you could trade BP’s shares via either a spread bet. With these very similar derivative products, you are simply speculating on the change in BP’s price, rather than actually taking ownership of the actual share.
Simply trading on a price change can save you costs, taxes, and hassle. But best of all, it can help you make much bigger returns. For example, you could easily make a 110 per cent return from the same 11 per cent price move.
Betting on Shares
Share spreadbets are increasingly common although you can also speculate on indices, foreign exchange and other financial instruments such as commodities and treasuries. IG Index was the first spread betting firm to offer bets on shares. They now make betting prices in over 1300 UK shares, including every FTSE 350 constituent, as well as thousands of leading US and international shares.
The idea of betting on a share (rather than buying or selling through a stockbroker or share shop) may seem a bit odd at first, but spread betting offers substantial advantages over normal share dealing:
Tax free profits
As with all spreadbets, your profits are free from UK capital gains and income tax.
You can take a position in a stock without having to put up the full contract value. Instead, you put up a margin deposit as collateral – this can be as low as 5% of the contract value. If you have a credit account some spread betting providers even allow you to open positions without having to put up any deposit. Spread bets normally allow traders and investors to leverage up to 10 times on FTSE 100 stocks and this allows potential for magnified returns.
Low transaction costs
There is no commission or stamp duty to pay. The only charge is the dealing spread, which is normally less than 1% of the share price.
Easy to go short
You can go long or short of any share that a spread betting company quotes. While there are other methods of shorting a stock, they are less straightforward and not usually available to smaller private investors.
Small minimum deal sizes
You don’t need to make big bets. The minimum deal size for UK shares can be as low as GBP1/point, the equivalent of 100 shares, depending on the price of the stock.
Bets on shares work in very much the same way as all other spread bets. Spread Betting providers make a quote for the price of a share on a given date in the future, or the end of the current trading day, and you decide whether you think the share will be higher or lower by that time. If you think it will be higher, you ‘buy’ at the spread betting provider’s quote. If you think it will be lower, you ‘sell’ at the spread betting provider’s quote.
A Spread Bet on HSBC
It is January and HSBC Holdings is quoted in the stock market at 951/952p. You check the spread betting company and they are quoting a live price for March HSBC at 949 – 956.
The spread betting provider’s quote for a forward date will normally be slightly different to the price in the stock market because their quote reflects the effect of interest and dividends.
Thing HSBC is overvalued, you decide to ‘sell’ GBP20/point at 949.
Your bet is the equivalent of a position in 2000 shares. This is because if you did own 2000 shares each penny movement in the price would be worth GBP20 to you. Over the next month, HSBC rises to 991/992 in the stock market. The spread betting firm is now quoting March HSBC as 989-996.
You decide to keep your bet open. By the time the bet expires in March, HSBC has dropped back a little and your bet is settled at 977, including the provider’s spread.
Your loss is calculated as follows:
Closing price: 977
Opening price: 949
You lose: 28 x GBP20 = GBP560.
Thinking the stock is cheap, you decide to ‘buy’ GBP20/point at 956.
You decide to take your profit. You close your bet by ‘selling’ GBP20/point at 989.
Your profit is calculated as follows:
Closing price: 989
Opening price: 956
You win: 33 x GBP20 = GBP660
Bottom line, don’t be afraid of spread betting. It’s a good way to trade because it’s tax free. 4000 shares in RKH shares will cost you £10,000. Instead of buying the shares, put £10,000 in your spread betting account and open a buy bet at £40 per point. You won’t get stopped out of your position since you’re not using any margin.
If you want to be a google share holder but don’t have enough funds to get close to the stock value (GOOG) there’s an easy way to get there and make money from the rise and fall of the Google stock, it’s called financial spread betting and you can leverage your bets without having to actually invest money like real life stock trading.
Spread betting shares is all about the stocks and your ability as a trader to invest your money in the stocks with their exact financial value as in real life but with a lot less capital than what it needs to actually own a portion of the stock or share.
Spread Betting shares is a good option since you can make money whether the stock is going up or down and you can protect yourself from unnecessary losses by putting a stop loss which is a built in feature in financial spread betting. A stop loss is actually limiting the losses on your account to the original amount you invested in your financial spread betting account.
Don’t be confused, at the end of the day you are not a share owner, which means you will probably not sit at the Google’s board of directors, however you can make easy quick money with less risk and less investment involved. Since leverage is a good option in financial spread betting, you can make a lot of money when a stock goes the right way for you, a lot more than you can make if you invest thousands and waiting for a stock to rise 1%.
Finally, spread betting is risky, whether it’s stocks, shares, commodities or forex, you are risking your money. Make sure you know what you are doing and that you gamble your money responsibly.