Why Bother With Spreadbets?
I’ll always remember an advertising campaign that the London Times did in 1967.
“Why should I read the Times, when I can get my facts from the opinions expressed in other newspapers?”
That’s kind of the way I feel about spreadbets and CFDs. When people say that it’s probably not worth learning about spreadbets as they can trade in all the different markets anyway, they are missing the most obvious point – you only need to have a spread betting providers and you can get all the equities, indices, forex pairs or commodities that you want. You don’t need separate accounts.
“Why should I trade spreadbets at one broker, when I can get all my trading from the offerings of several other brokers and dealers?”
How does it Work?
I don’t know why more people don’t do spread bets or CFDs. The major upside is that there is no Capital Gains Tax to pay and you can leverage or short companies if you like (it is a bet, not a holding). Of course, the downside is that you don’t enjoy shareholder rights.
I still hold some shares in an individual savings accounts (ISA). The majority of my money is on spreadbets though. They give wide market access and you can get most tickers. You also get good free charting, and most of the companies are large enough to be resilient. I use CMC, Capital Spreads and IG Index (mostly IG index).
Do you get dividends if you are long with a spread bet?
Yes, you get them indirectly. I was surprised in my earlier days when I used to get deposits from somewhere and it turns out these are dividends.
How does it work?
With IG Index you can do a spread bet against a certain expiry option on a share. I normally pick the furthest away expiry – on a share like DGO this is the September expiry. For these there is no rollover cost each night. The only real cost is that the spread is a few points wider than a shares spread, or a day cash price spread.
When expiry comes around you can either close it and open a new one yourself, or you can ring them and “roll it over” to the next expiry period. The cost for this is half the spread on the next period. They are mostly quarterly expiry periods.
A plus for spreadbets is no per trade fee, so you can do as many as you like (but there is still a significant buy sell spread)
DGO cash: 442.89 – 445.86
Sept expiry: 444.32 – 450.45
Who is suitable?
Spread Betting and CFD’s suitable for traders/speculators and perhaps to hedge shares held in a bear market. Not so suitable for long term investors.
SPREAD BETS VS SHARE TRADING
SHARES: 100% of the capital is required upfront to execute your trade.
SPREAD BETS: Spread bets are a leveraged instrument and some equities require only 5% of the capital to trade (dependent on individual equity).
Go long or short
SHARES: Generally, you can only profit from rising prices unless your broker offers stock loan services, which can be complicated.
SPREAD BETS: You can profit from both rising and falling markets, and shorting a CFD is as easy as going long.
SHARES: Order types vary between stock brokers.
SPREAD BETS: A company like GFT offers eight different order types – from the usual direct deal and market orders to limit/stop orders and trailing stops—to help you manage your risk and protect your potential profit.
SHARES: When owning shares, you can receive dividend payments and have voting rights because you own the underlying asset.
SPREAD BETS: With spreadbets, you do not own the underlying asset so you do not have voting rights, but you can receive dividend payments if you have bought spreadbets.
Speed of execution
SHARES: Electronic platforms typically offer faster execution compared to telephone-based brokers
SPREAD BETS: Most spread equities are traded electronically and therefore trades can be executed quickly
SHARES: Liquidity is restricted to availability in underlying exchange
SPREAD BETS: Spreadbets are derivatives of the underlying exchange and can sometimes provide increased liquidity