Advantages of Spread Betting

Advantages of Spread Betting

Spread betting has become increasingly popular among retail investors and city traders because of the additional benefits that it offers.  In short, with a little market knowledge and expertise it is far easier to make money from spread betting.  In fact, TradeFair cheif executives have stated that spread betting in the UK is seeing growth of 30-40% per annum.

But What Exactly Makes Spread Betting So Popular Among Day Traders?

First of all I think that the biggest incentive for spread betting in the UK is that all profits are tax-free (you can confirm this on the website here).  This means that you don’t have to pay 40%-50% income tax like you would for normal share trading, which in terms helps you to generate more profits.  Spread betting is also exempt from Stamp Duty because there technically isn’t a 3rd party involved (there is a 0.5% sub-charge on all shares bought under conventional share trading).

The reason that spread betting is tax-free is because the body which regulates it (FSA, now the FCA (Financial Conduct Authority) identifies spread betting as a form of gambling.  This is because the odds are always slightly in the bookies favour because of the “spread” – how the brokers generate their commission.  You’ll notice that the “bid” price is always slightly higher than the “offer” price, leaving the odds marginal in the financial brokers favours.  Although 10 or so years ago the spread charged by the spread betting platforms was up to 10 points, nowadays these have been reduced due to higher competition.

The “speculative positions” that you can take up with spread betting, along with leverage, also means you can make significantly higher profits on stock/currency or other financial movements.  Leverage, or “gearing”, means that you make trades with a net value significantly higher than the amount that you deposited.   For example, if I deposit £100 than I can take up positions offering me returns of up to £1,000 or even £2,000 (depending on how far the market moves).  Usually most financial spread betting platforms will offer a margin of 10%.  This means that if you deposit £100, you can actually risk up to £1,000 in market trades and transactions.

Because spread betting involves trading on margins, it also allows you to make higher profits from individual stock movements.  For example, let’s say that you deposited £10 and wagered £10 per point on Microsoft stock.  If the stock rises from 150p to 160p than you will make £100 profit.  On the other hand, if you actually invested in Microsoft stock outright, by buying £100 worth of shares, than you would have only made around 7% ROI (£7 profit).

As you can see in this spread betting vs ordinary share trading example, you can make far more short term profit by speculating on stock movements by trading on margins, as opposed purchasing financial instruments like shares outright.

Finally, the advantages of spread betting is that anyone can do it and nowadays spread betting platforms allow you to bet on an array of markets.  You can speculate on the currencies/FOREX markets, bonds markets, stock markets like the FTSE 100 or German DAX, or even commodities markets by spread betting on the price of sugar, gold or crude oil for example.

The majority of spread betting platforms also provide a range of orders to help you to minimise your financial exposure. You can execute stop-loss and limit purchases for example, which limit your losses by automatically closing your account if your stock drops below a certain figure (usually 10% in value).

To begin spread betting and open up a demo account to understand how it works, view our recommended spread betting platforms.

Leave a Reply