Spread betting is one of the greatest innovations in financial markets for the private investor and trader of the last two decades. It has opened up markets and strategies that were previously reserved for professional and institutional investors.
By betting on the movement of a share price instead of investing traders can leverage, go short to profit in bear markets and access markets such as, bonds, gold, FX and indices such as the FTSE, DAX and S&P.
Plus, as spread betting is categorised as a bet, it is currently not subject to capital gains tax. That, plus no commission, stamp or custody charges, make it a very clear and admin free way to speculate on the financial markets.
Obviously, there is a downside as leveraged trading is very high risk and as we know, a high percentage of clients lose money when trading.
Spread betting is unique to the UK market because there is no tax payable on capital gains from profits on spread betting.
The story goes that way back when the tax man though they were missing out on a huge amount of revenue from spread betting traders. So they visited all the brokers only to discover that actually, most people don’t profit from spread betting. Meaning that if they were to tax spread betting profits, it would mean that traders could offset the loses from spread betting against capital gains from longer-term investments. And as such kept schtum….
There are a plethora of spread betting brands, providers and platforms to choose from. Here, I’ll go through by the process of elimination as to which spread betting broker you should have your account with.
But before I do, remember that trading and brokerage is a relationship business. Whether that is a relationship with a broker, salesperson, dealer, CEO, trading platform, colour scheme or research analyst. Whatever broker you choose is completely down to personal preference. Traders just like what they like…
The only two things that really matter when choosing a spread betting broker are…
- Will they go bust?
- Can they fix trading errors?
Most spread betting companies offer pretty much the same spreads, latency, online trading charting and research tools so you really need to concentrate on the two key points of any financial service provider.
Firstly disregard the spread betting white labels
A white label platform is where a brand will put their logo on a spread betting providers platform. If you are interested you can read up on the main spread betting white label providers here.
I say you should ignore white labels because you simply won’t get the customer service of dealing with a firm direct. You’ll always be going through a middle-man by the brand or treated with slightly less importance by the provider at the other end (because they are earning less from your account).
On the two key issues you must remember that if you are going with a white label you are not actually a customer of the brand, you are a customer of the underlying spread bet provider and they hold your funds.
So if you are trading with a Hargreaves Lansdown branded spread betting account, you are not reliant on Hargreaves Lansdown’s balance sheet, but that of the provider (in this case IG) to protect your funds.
When it comes to trading errors, you can’t talk to your brand as they have little to no control over the platform, so if there is a problem, it will be slower to be sorted.
Also, errors and mistakes (regardless of who’s fault it is) are normally settled by way of a commercial decision from the head of trading.
Decisions are more likely to fall in your favour if you deal direct, as the broker earns more from your account and therefore has a greater interest in keeping you happy and trading longer.
That leaves the main spread betting providers
Publicly listed spread betting firms versus unlisted firms.
It goes without saying that even though spread betting is gambling it is also regulated by the FCA.
Therefore never go with a firm that is not FCA regulated. But more importantly, there are spread betting brokers that are listed on the London Stock Exchange or New York Stock Exchange.
Remember you are trusting these firms with huge amounts of your money and even larger exposure to the financial markets.
It doesn’t matter if you are using spread betting to speculate or hedge longer-term positions you need to be sure that the firm is financially sound and well capitalised.
There are no guarantees that any firm will not fail. True the FSCS does protect client funds up to a certain amount.
But above that amount, even segregated funds are only segregated from the firm’s money, not other clients. So if a client has a massive loss, ends up in negative equity (which professional clients can).
That negative equity will be covered by other clients funds until the broker recovers the cash from the client.
All firms have problems, there are trading errors, from clients and dealers. Sometimes £1m of stock is bought instead of £100k. Sometimes things are bought instead of sold. It is the nature of the business.
You need to be in a position where you can tell there are problems early on and get your cash and positions out to another broker as soon as possible.
Public firms are required to report results and cash positions on a more regular basis than private firms, so keeping an eye on the share price is a very clear indication of how safe your cash is.
This is still no guarantee, which is why you should always have more than one account and have your exposure diversified.
Two publicly traded spread betting firms to choose from
Of the two main providers, only IG (read our IG review here) and CMC Markets (read our CMC review here) are listed. Yes, City Index is listed in New York as it is owned by Gain Capital, since Michael Spencer sold it. It’s up to you if you want to trade with the American’s though. Especially as the US won’t let their residents trade with UK firms.
On a final note: It’s not recommended to have just one account. It is worth looking at the other main spread betting brokers in this article for secondary accounts.
You can view spread betting brokers in our comparison tables and click through to read up on what traders think of them in the client review sections.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.