Pros and Advantages

For the experienced investor, spread trading offers a number of benefits – like only needing a deposit of around 5-10% of the value of your chosen asset, and not paying any UK Stamp Duty. Not to mention having the opportunity to make money even when share prices are falling. But remember that spreadbets are not suitable for everyone, so you need to fully understand the risks involved.

Spread trading is a leveraged tool that given the investor the opportunity to back their judgement on the direction of a financial market. Spread bets (or spread trades) are an increasingly popular traded instrument that allows for speculating on the movements of the financial markets.

Spread bets are essentially a stock derivative product that enables traders and investors to take an opinion and participate in the price movement of an underlying share or stock index without taking ownership of the underlying instrument itself.

Trading spreadbets is a simple and instantaneous trading option, with no commission on all instruments apart from a bid-offer spread. Spread betting companies take the price of an underlying market and add a ‘spread’ to that price. The spread is the difference between the sell and buy price. Spread bets are regulated by the FSA (Financial Services Authority) and this offers a number of benefits.

Benefits of Spread Betting

• All your profits are free from UK capital gains tax and income tax. Spread betting doesn’t incur any stamp duty costs or commissions either, meaning that you keep all of your profits made in trading whilst the main cost of trading is factored into the spread.
• Margin Trading: Leverage is an efficient way to utilise limited capital – you can have just as much market exposure for a fraction of what you would have to pay for real shares.
• You are afforded a wealth of protection by the FSA, alongside the peace of mind of knowing that you have a legal right to your winnings.
• The ability to go long or short or hedge easily: Make money from both rising or falling prices. With spread betting you can easily profit from a falling market just as easily as a rising one. If you believe that a market will fall, you can take a spread bet to short sell the instrument with the expectation that you can close your position at a later date at a cheaper price.
• As a beginner, there are companies that allow you to trade with as little as 10p per point, giving you the opportunity to develop confidence and experience.
• Some spread betting companies offer guaranteed stop losses to limit your loss.
• No commission or stamp duty to pay. The only charge is the spread betting company’s dealing spread.
• Access Many Markets: Gain exposure to thousands of individual shares, indices, commodities and forex pairs from one spread betting account on a single platform. Spread bets mirror the changes of leading equity markets (of global exchanges). Trade the FTSE 100, Dow Jones 30, S&P 500, Hong Kong Hang Seng and others!
• Extremely Tight Spreads: Spread betting providers nowadays compete with each other on price ultimately translating into better bid-offer spreads for us.
• No currency risks: An issue concerning traders wishing to deal in overseas markets is that investing of foreign exchange movements. With a traditional broker your foreign holdings will be priced and traded in the local currency rather than sterling. This means that in the event that the pound were to rise in value against the respective regional counter, then the market value of your trade will lower in sterling terms, although of course it will also increase should the pound fall. This problem is eliminated with spread betting as all your positions will be denominated in sterling.

One argument often put forward in favour of spread traders is that they allow the possibility to gain exposure in global markets easily at very competitive prices. As opposed to seeking a local broker that allows you to invest in offshore funds, you can spread trade the likes of Apple or McDonald’s much more easily than if you were to seek to buy the underlying stock.

What are the main advantages of trading spread trades? You can trade short and long, cost-effective entry into trading, lower brokerage costs, Spread trades are traded on margin.

Spread betting carries a high degree of risk which is why getting educated is the first step to overcoming such risks.

In practical terms, investing in stocks through spread trades offers similar profit / loss opportunities as when trading stocks in the traditional manner. However, there are certain powerful advantages to consider:

Gearing: Spread trading allows traders to leverage an investment up to 20 times under normal conditions. For aggressive, risk-taking investors, the ability to leverage the investment is a principal benefit of the product. Of course, the higher the level of gearing, the greater the loss or gain. Therefore, traders must be clear about the risk of trading in leveraged securities. In effect, you can double or lose your money by a 5% move in the underlying stock or index, if you are fully leveraged on your deposit. So it is important that you choose your level of gearing carefully and only apply as much risk and money as you can afford to lose.

Short-selling: Short-selling is the act of selling a security that you do not own. Selling the market short is particularly efficient using spread bets. Investors do not need to borrow stock or pay financing costs for borrowing stock. By trading a spread bet, the speculator simply clicks the sell button and buys back the spread bet some time in the future. This is achieved by going short (that is, selling) a stock or index.

Instant trading: Serious investors look to spreadbets for the rapid trading capability they offer – instantly tradable prices. Using a spread betting company, investors can hit the price immediately when it reaches the level they seek, and receive an instant confirmation of the trade at that level.

Hedging the portfolio: Spread bets can be used to hedge an existing stock portfolio. Rather than liquidate or sell one’s physical stock portfolio during a period of falling prices or volatile markets, investors can quickly hedge potential risks by selling the equivalent position using spread trades for a short or long period, thus securing effective protection for their stock investments at little or no cost.

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Fortunes have been made and lost on financial spread betting – Mike Ashley, owner of Newcastle United, reportedly lost £300 million on a long bet on HBOS, Vince Stanzione on the other hand made well over £2 million spread betting commodities.

As mentioned in the last post I have been doing some reading on the matter of spreadbetting before getting involved – what is spread betting?

How does spreadbetting work? Can you make good money off spreadbetting? And can you give up your day job to do this from home?

The Sunday Times reports that there are well over a million traders in the UK at present, and they note that this form of investing/gambling is relatively new for the private investor.

Barriers that once hindered access to the markets and making money off the markets have been broken down by the advent of new technologies and an array of spreadbetting companies and platforms that now offer access to the markets to those with relatively small amounts of capital.

Company shares, indices, commodities, options and forex are now all available to the private investor – and no broker needed.

I think it is this direct control that appeals to me and a lot of others that have been attracted to this new form of speculation. The idea of dealing through a broker does not sit too well with me, especially as I am new to investing on the afforementioned markets.

And importantly – there is another great advantage to spreadbetting – it is tax free where other forms of trading shares are not. Brilliant. Stockbrokers include commissions on trades and any profit made from the purchase and subsequent sale of shares is subject to Capital Gains Tax.

Risk and profit

As with all kinds of investments we can expect a degree of risk. The higher the gains that can be expected conversely implies that the risks are just as evenly weighed.

Spreadbetting is leveraged – what this essentially means is that it is geared. Just as a gear in a vehicle is designed to amplify the revelations provided by the engine and deliver more to the wheels, so spreadbetting amplifies the return, or loss, on a an initially small bet.

Now I am yet to get involved in spreadbetting – I imagine that things will become a lot clearer once I actually start placing trades and seeing firsthand how this all works.