7 Spread Betting Advantages

Published by Filipe R. Costa on Tue, 05/07/2011 - 15:15
number seven

Some people have mistaken ideas about what financial spread betting is, due to a wrong association they make between the word “betting” and gambling. Spread betting involves stakes but it is not exactly gambling. It is just a way of getting exposure to financial markets, and a very effective one when compared to other traditional approaches.

Spread betting lets you trade shares in a simple way. Instead of buying a certain number of shares, you place a stake per point movement. If, for example, you want to buy 1000 shares of Kazaknmys at 1,400p, you will have to place a total order of £1,400 on your stockbroker. The alternative in terms of spread betting is to place an order of £10 per point. If Kazakhmys flies to 1,500p, you will profit £100 (100 points times your £10 stake per point). That would be exactly the same profit you get on the 1000-share buying plan at a stockbroker.

If spread betting can mimic traditional trading, then what are the differences?

Firstly, spread betting is a leveraged product, meaning you are trading on margin. You don’t need the full amount needed at a stockbroker. In the above example, the total cost to buy the shares is £1,400. A spread betting provider will only require you to have something between 5 or 10% of that to constitute an initial margin requirement. It will charge you interest but you can apply the remaining funds in other profitable arenas.

Secondly, you don’t pay commissions to your provider. Commissions are included in the bid-ask spread and are fixed and usually very low. Traders with little funds won’t see their profits being absorbed by commissions.

Thirdly, if you trade UK shares, you will love to know that you don’t pay stamp duty in spread betting.

Fourthly, there is no capital gains tax, so the activity is tax-free.

Fifthly, you can avoid the exchange rate risk since spread betting providers usually allow you to place all trades in your chosen currency no matter the currency in which the market you want to trade is quoted. You can trade Intel shares in pound per point.

Sixthly, you have a global offer of markets including shares, indices, interest rates, bonds, currencies, and commodities, all in the same account. That is not the case with most stockbrokers.

Seventhly, trading occurs 24h/day. Most assets are traded in continuous.

Financial spread betting is easy to understand, very transparent, and an effective way of trading a full set of markets. It has many advantages over traditional trading. Nevertheless, being it a leveraged product, risk must be correctly managed to avoid losing too fast when markets move against you.