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But what is the catch with spread betting?

Written by David

What’s so bad about spread betting? It’s tax free and there are no charges on making a trade. Right now I own stock which costs £12 per trade so it seems to be only a good thing. Of course in the UK you don’t pay CGT but you also can’t offset your losses against future capital gains. As I understand it spread betting came out of the costs of actually trading the underlying – particularly in the United Kingdom where stamp duty for stocks is a killer. It has grown from there and in the United Kingdom profits are tax free (subject to conditions) and hence a viable option for many….this is a very valid argument driving its success.

I suspect a large part of the problem with spread betting is the name – it sounds like gambling, which, of course, it is, albeit slightly more sophisticated (maybe) than choosing a horse from the racing pages of The Sun 😉

But remember that spread betting and day trading in general is a zero-sum game. You’re betting that you know the market sufficiently better than the counterparty to make a game, so isn’t an activity to be in without a deep understanding of the market you are trading. Best to open a demo account with a couple of spreadbetting companies, try their platforms / charting and trade in demo mode for quite a while, learn when to buy and sell in demo mode and not with your own money. I guarantee you will be cleaned out if you learn the hard way.

The mechanics of spread betting make it seductively easy to trade without due thought process about what you will do if price goes in your direction or against it. It’s twice as easy to make errors of judgement because, unlike shareholding, you can short as well as buy. Plus, again, unlike shareholding, you can be liable for losses greater than your account size. But there are tools and self discipline methods available to counter all these. The market is never your enemy, you are.

If you hold a spread bet for more than few months, you will find, the daily financing due to the leverage will cost you a lot. If you are holding for a long time, the only way is to use the standard stock purchase system with zero to minimal leverage (although with current global very low interest rates you can hold a position for many months). You can of course trade the futures contracts, but you will find yourself being charged a small financing fee every 3 months when the contracts swap.

The other thing is that the bid-offer spread on less traded instruments can be large plus you can only get filled on the offer (or bid to short), which can be a disadvantage. It is also worth noting that spread betting providers make up their own quotes after market hours but then they are forced to do that if they are to offer after-hours trading. In most instance they are acting as a broker and act as an exchange. I don’t think they hedge all their trades. Since many end up on the loosing side, spread betting providers earn not only commissions but the money which a trader has lost as well. But then we know that day trading is a zero-sum game – the money have to come from somewhere – if your spread betting company (or indeed your broker) is trading against you, it’s by accident, not design). Yes – you will also have the counter party risk and the issues of widening spreads. However for the upsides of leverage, low costs and flexibility for variable position sizes and different instruments, there is definitely a good reason to trade via a spread better for some traders.

Research has shown that a major factor for so many losing is transaction costs. Spread betting companies make their money off the spread, ie. the difference between what they buy and sell it at. Usually only a few cent but on high volume trading it adds up. For scalping I think spread betting is a bad choice but for swing trading it is fine. For intraday trading, the spreads can make turning a profit too hard, but people make money if they are good at trading, and can trade something liquid like the GBPUSD which generally has only a 2pip spread on spreadbet platforms.

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.

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