Chapter 2
Why Spread Bet?
Financial spread betting is one of the fastest growing areas of financial trading, particularly in the UK where there are many spread betting companies with thousands of customers.
There are a number of reasons why financial spread betting has become the most popular form of financial betting in the UK. Spread betting offers several advantages over more traditional forms of financial investing and trading.
Wide range of markets with maximum flexibility
One of the major advantages of spread betting is that you have the opportunity to bet on a very wide range of financial assets or events. Spread betting enables you to speculate on whether the price movements of an asset will rise or fall.
You can find spread bets on everything, including:
This large amount of innovation in the industry means spread betters can look across the whole gamut of financial markets worldwide to find the best opportunities each and every trading day. Some spread betting companies registered in the UK offer betting on more than 20,000 financial instruments.
Spread betting can open up for you the opportunity to trade faraway markets such as Australia and Hong Kong, markets you may not have previously had access to, just as easily as share trading local London stocks. And you can trade all these markets – including gold, oil, and bonds – from just a single trading account.
Spread bettors can also trade either side of the markets. It is just as easy to bet on the price of an asset going down – effectively, selling short – as it is to bet on it rising.
Many spread betting firms also offer the additional flexibility of being able to trade in smaller sizes than standard share or market contract sizes.
- Learn more, take our free course: Financial Instruments Explained
Open to small investors
Another major draw of spread betting is that it can be done with a very small amount of trading capital. This is due to the fact that with spread betting you don’t actually buy the underlying financial asset that you want to trade.
Instead, you simply take a trading position by entering a trade on a spread betting company trading platform that only requires a small margin deposit, speculating on whether the market price of the underlying asset will rise or fall.
The margin required to hold a spread betting trade is only a small amount of capital because spread betting is a highly leveraged product.
This means, for example, that a spread bettor could hold a trading position equivalent to buying £1,000 of stock shares by only putting up a margin deposit of £200.
Opportunity for big profits
Because of the high leverage offered, spread betting offers traders with just a limited amount of money the opportunity to make potentially very large profits with just a small investment.
High amounts of leverage make for the ability to generate sizeable profits – substantially more than the amount of margin you put down to place your spread bet. However, traders need to keep in mind that leverage affects both profit or loss in equal measure.
While it is quite possible to make more money than your investment in a spread bet, if you’re wrong in the way you bet, you may end up losing money – even more money than your original deposit. It is possible to manage your potential losses with a stop-loss order.
The stop-loss order will automatically close out your bet if the market moves a specified amount against your spread bet position. Please ensure you understand the risks of spread betting before placing any trades.
- Learn more, take our free course: Margin Trading Demystified
Tax-free trading
Spread betting offers one huge advantage over other types of financial trading – it’s tax-free! Spread betting gains are not normally subject to either capital gains taxes or income taxes and are also free from stamp duty charges. These tax savings can substantially increase your net profits on spread betting.
Spread betting is tax-free because, unlike making a traditional investment such as purchasing stock shares, spread betting is simply a bet between the spread bettor and the company that offers spread betting. The only tax that applies to spread betting is a 3% betting tax which is charged to the spread betting company, and that is absorbed by the spreads.
Commission-free trading
There are no broker commissions charged in spread betting. All the costs are instead built into the bid-ask spread (also known as the point spread) offered to spread bettors. The buy price for a spread bettor is the ask price, and the selling price is the bid price. Tight spreads are to the trader’s advantage.
Not having to pay commissions getting in or out of trades is especially an advantage when one is frequently trading in small trade sizes, as most spread bettors do.
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No currency exchange risk
Trading in foreign stock shares, CFDs (contract for difference), or other financial instruments usually involves the additional risk of foreign currency exchange rates.
In contrast, currency risk is not applicable to spread betting, which means that you can do all your trading – even spread betting on foreign financial instruments – in pounds per point, without ever having to worry about currency exchange rates.
With all the above advantages, you can create your own home business as a spread bettor, and – if you’re a good spread bettor – it can provide you all the income you want or need.
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Learn the skills needed to trade the markets on our Trading for Beginners course.
