The extra spread that firms charge is not a cost traders ought to worry about because if you traded shares, you would need to pay a commission to a broker for doing so and pay tax on any gains made when you come to sell them and pay commission again to your broker for selling them. Commissions for buying and selling shares range between £10 and £20 a trade depending on the broker.
The Government will also charge you stamp duty of 0.5% when you buy shares, so if you buy £2000 worth of shares, you will be charged £10 for the privilege of doing so by The Treasury.
Let us look at an example of trading £14,000 worth of BP shares to compare costs between a share trade and a spread bet, remembering that prices for shares and spread bets are quoted in pence.
Commissions for buying and selling shares range between £10 and £20 a trade depending on the broker.
Share Trading with a Broker:
Let’s say Yahoo stock is quoted at 426.30 – 426.35 at a brokerage company and 426.11 – 427.82 at a spread betting company.
We decide to make the following trade:
- Buy 3,284 of BP shares at 426.35 each = £14,001.34.
Costs for buying shares: 0.5% stamp duty (£70.01), broker commission (£10.00).
The shares subsequently go up in value to £5.00 a share.
- We sell all the 3,284 BP shares at the new price of 500p = £16,420.00 (gross profit £2418.66)
Costs for selling shares: broker commission (£10.00), capital gains tax at 18% 16,420 – 14,001.34 x 18% = £435.36.
Total costs: 525.37, minus gross profit (£2,418.66) = £1,893.29 net profit.
Share Trading with a Spread Betting Firm:
- Buy spread bet at 427.82 x £33 a point = £14,118.06.
Costs for buying spread bet: Spread (427.82 – 426.35 = 1.47 x £33 a point = £48.51)
Like the above share trading example, the share price subsequently rises to £5.00 a share
- Then sell spread bet as quoted by spread betting firm at 499 x £33 a point = £16,467.00 (gross profit 2348.94)
Costs for selling spread bet: Spread (500 – 499 = 1 x £33 a point = £33).
Total costs: Spreads: £81.51, minus gross profit (2348.94) = £2,267.43 net profit.
The only cost to this spread bet trade is the spread which is £81.51. Comparing the spread bet trade with the share trade, there is a significant saving of £374.14, or just under 18%, mostly due to not paying capital gains tax. I could wade through hundreds of different examples quoting the different spreads that firms charge as well as their finance costs; such an exercise would fill the remainder of this e-guide.
The important thing to remember from the previous examples is that if you are new to trading or if you want a cost effective way of trading shares, then spread betting remains the best value for money; it is the best entry level product to new traders simply because of the low costs and ease of use, as well as being able to practice placing trades and perfecting a trading strategy using a demo account.
Do shop around for the best deal that you can and be sure to read the spread betting firms’ terms and conditions. There are often good offers for new traders, usually with some sort of freebie. You may or may not be thinking of opening a spread betting account. If you are, that’s great! But a word of warning;
A financial health warning though:
“Spread betting is high risk (higher risk than traditional share trading) and can be financially dangerous. One of the reasons is because of leverage, also known as margin; more specifically, an incomplete understanding of leverage will lead to losses and can leave you seriously out of pocket. One of the main reasons why traders lose so much at spread betting is because they fail to understand the nature of leverage. For that reason, I recommend reading the next section of this e-book carefully as it will help you to understand some of the risks involved in spread betting.”
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