What are the reasons for the popularity of spread betting trading? There are many reasons why people embark on spread betting, however, of course, the main reason is to try and make money. Many of the advantages are extremely lucrative:
- Spread betting offers investors the possibility of making a lot of money (but there is an equal amount of risk).
- Profits made from spread betting are not subject to tax in the United Kingdom (at the moment)
- Investors can gain access to worldwide financial market trading
- Trading can be intellectually challenging and exciting
- Only a small relative amount of money is required if you try spread betting to open your trade
- Spread betting is available 24 hours a day (even some markets on the weekends)
- It is possible to profit even from a falling market, by going short
- Spread betting can help you hedge your longer term growth investments
- It enables a more diverse investment portfolio
- Trading can easily be done from smartphones or tablets on the move thanks to many mobile apps which are available from the top brokers
Let’s look more closely at these many advantages to find out why so many people are attracted to spread betting.
Profits Free From Tax
Perhaps the greatest benefit of spread betting is that all profits are free from tax in the UK, with spread bettors being exempt from stamp duty and capital gains tax. The reason for this is because it is considered to be a derivatives product – investors do not buy a security, instead the bet on what its future price will be. This makes a huge difference to your potential profits.
How Are My Profits Affected By Tax Exemption?
If you try spread betting, it’s possible to earn an additional 28% or 18% return on any profits. Capital gains tax stands at either 28% or 18% (depending on your tax rate) on your profit if you sell your shares. Not only this, but stamp duty (a tax of 0.5% currently) is usually applied to share purchases in the UK, but spread betting is exempt from this. For both of these reasons, spread betting is a more profitable choice than stock broking, for example, where the underlying security is purchased.
Trade More, Pay Less
Tax savings are not the only reason to try spread betting. Another advantage is that it is leveraged, and therefore only a small amount of the security’s price needs to be deposited in order to speculate. If, for example, you tried spread betting using a margin or leverage of 10%, the initial cost of the trade is just £500. This compares very favourably with stockbroking, where £5000 must be paid out to open a trade for £5000 of shares. This means you need a lot less money up front if you want to spread bet and this opens up wider access to the markets.
So, if you spread bet with a 10% margin, who pays for the remaining 90%? The answer lies with the provider of the spread betting services who, effectively, covers the trader. The size of the margin will differ between different markets and providers, with lower margins generally being offered on more popular markets. You should note, however, that while leverage often is celebrated as a top feature of spread betting, it also magnifies the risk as it becomes possible to lose more money than you used to open your trade.
Profiting While Others Lose
Good news often causes the price of security to rise, however negative reports often lead to rapid panic selling, which results in the price dropping. Spread betting offers the possibility of short selling, allowing you to make a profit by betting on a fall in the market’s value. This offers the great advantage of potential for big returns.
So, how does short selling work? Short selling involves selling the security before buying it again once the price has dropped. If you’re asking how it’s possible to sell shares you don’t actually own, the answer is that your broker is lending the share to you when you are short selling, so those shares are sold immediately on the markets. Once the market has fallen, you then can purchase back an identical amount of the same shares, giving them back to your lender so you can settle your debt. You will then profit from any difference in price between the original selling price of the asset and the cost you incurred in purchasing it back.
For example, if the Lloyds Banking Group currently trades with a value of £73 for each share and you have reason to believe those shares will fall soon, you can short sell a thousands shares in the company for £73,000. Soon after, you were proved correct when disappointing results in the release of Lloyd’s half-year profits cause the price of shares to drop to £72.50. This means you can purchase a thousand shares in the company for £72,500. The shares are then returned to your lender who will accept the amount of shares that they lent out, regardless of the value which has decreased. You will make the profit of the amount of difference between the selling price of the share at the beginning of your trade and the price that you paid in buying them back. In this case, £500.
While short selling can offer its own advantages, theoretically, the price of a security can continuing increasing with no limits. This is different to buying securities outright, where market prices are limited to dropping down to zero and no further. Due to this, you need to implement guaranteed stops, or stop losses, on short positions.
Why Do Investors Short Sell?
The reasons for short selling are two-fold. Some traders just have a feeling that a particular market is going to fall, whereas others short sell as a way of hedging their risk.
Short Selling The Dax – The Winning Trade
Back in the January of 2000, one wise investor carried out research and decided that there was likely to be a drop in the Dax level. So he made the decision to sell at 6955, beginning at first with only a small stake but increasing his position size as his confidence grew. Over the course of 18 months, his predictions proved to be right, with the trader closing his position with a £1.1 million profit at 3550.
While shorting may be profitable and you don’t need to be limited to just a single side of the markets, only begin shorting after you have familiarised yourself with trading and are experienced in its risks.
What Can You Trade?
Whether you decide to bet on a fall or a rise in the market, spread betting offers the potential of trading on literally thousands of different markets. Depending on which provider you choose and the various markets on offer from them, you may be able to speculate on:
- Interest rates
- Foreign Exchange
Not only can you choose to speculate on numerous markets, you can also trade 24/7 if you choose. This means it’s possible to benefit from events which take place out of the market’s standard trading times, when other investors miss out. Oil is one market which offers a clear example of this. Saudi Arabia has considerable influence over the oil market, and any decision which is made out of standard trading hours would result in a sudden fluctuation overnight.
Also in our ultimate guide to spread betting, it covers:
- The Potential Risks
- Making A First Trade
- Positive Thinking – Going Long
- Going Short – Winning A Trade From A Falling Market
- 5 Ways To Make A Profit From The Market
- Spread Betting’s Hidden Costs
- Choosing The Right Provider Of Spread Betting Services
- Glossary Of Spread Betting Terms
- Compare spread betting brokers, features, accounts and markets