Spread betting explained aims to do just that. If in the following material you spot something that is not factual or is incorrect please contact me and I will rectify it as soon as possible.
A Brief History
Financial spread betting or as I prefer Spread betting started in the UK in the 1970’s as a way to speculate on the changing price of gold. Stuart Wheeler started Investors Gold Index (now IG Index) with a £5,000 loan in 1975. As spread betting gained in popularity more and more instruments were added. In the late 80s more spread betting firms came to the market place and have continued to do so through out the 90s, 00s and many are still joining the market as the demand for spread betting increases.
Spread Betting Vs Regular Brokerage Account.
Spread Betting Account
Regular Brokerage Account
|Do I own the shares?||No||Yes|
|Will I have to pay tax on my earnings?||No||Yes. There is stamp duty and capital gains tax on earnings over a certain threshold.|
|What is the charge for buying?||It’s covered in the spread||What ever your stock brokers charge is for buying shares on your behalf. This varies greatly between stock brokers.|
|What is the charge for selling?||It’s covered in the spread||What ever your stock brokers charge is for selling shares on your behalf. This varies greatly between stock brokers.|
|Am I gambling?||Yes||Yes|
|How much money do I need?||Spread betting requires only a portion of the money required to buy the same amount of shares, this is known as the margin.||You will need the full amount of money required to buy the quantity of shares you desire at their current asking price.|
|Can I lose all the money I Invest?||Yes. You can lose all the money you have in your spread betting account and more because it is a leveraged product.||Yes. If the company goes bankrupt or the share price drops to zero you stand to lose all the money you have invested in them.|
|Is there a way to protect my capital so I do not lose it all?||With spread betting you can use a stop loss order. Some stop loss orders can be guaranteed so you will only lose a predetermined amount of your capital.||Many stock brokers do not offer stop loss orders. Therefore you need to use a mental stop loss if any at all. A mental stop loss is where you order your broker to sell your shares when the price reaches a predetermined value. The question is will you stick to your mental stop loss or will you hold out thinking the price might recover?|
|Does it cost me money to keep my position open?||Yes it can. Because spread betting is leveraged, the spread betting firms essentially loans you the money required to buy the full amount of shares on the open market. Since they loan you the money they charge interest on this loan on a daily basis. The financing charges vary between companies but I typically pay £0.01 per day to keep a £1 per point bet open on an instrument priced at 100p. Therefore if this bet is open for 100 days it would cost me £1 in financing charges. There are such things as quarterly bets where the bet will be automatically closed on a certain date. For this type of bet there is no daily charge but the spread tends to be different to the rolling daily bet.||No|
I personally prefer spread betting for more regular trading of small amounts and a regular stock brokerage account for buying and holding shares over a longer period and in larger amounts. The main appeal of spread betting for me is the tax free advantages. There is no tax to pay on any profit you make. I don’t see this changing in the foreseeable future either. If the government decides to start taxing spread betters on their winnings then any losses they make can be used to claim tax back from any other income they might have.