Guide to Spread Bets
Guide to Financial Spread betting
WHAT IS SPREAD BETTING?
Spread betting on financial products is a way investors and gamblers can speculate on the movements of a wide range of financial products not usually available to people outside major financial institutions.
EXPERTISE
Although spread betting can be enjoyed simply as a game of chance it can also be a very good way for anyone with a keen and up to date interest in economics and the financial markets to put that interest, knowledge and expertise to profitable use.
TAX ADVANTAGES
Spread betting has the added advantage of being tax free. Investors can speculate on the stock market as well as on shares, interest rates, currencies, commodities, options and futures without being liable for tax. It also offers them the opportunity to sell 'short' in the markets which means participants can operate in the same way as official traders by anticipating the movement in the market value of a particular instrument and speculating on that instrument going down in value.
NO STOCKBROKER'S COMMISSION, CAPITAL GAINS TAX OR STAMP DUTY
There is also no stockbroker's commission payable on spread betting. Clients normally only pay for the positions they 'buy' at and as these are usually higher than when they are sold the betting company makes the difference as profit. As spread betting on financial instruments is seen as gambling there is no tax on capital gains or regular income and there is also no stamp duty.
SPREADBETTING INDUSTRY REGULATION
While spread betting enjoys the tax benefits of gambling it is run by financial firms who specialize in financial products and in the UK these firms are regulated by the financial authorities.
Background
BACKGROUND TO THE SPREAD BETTING INDUSTRY
Spread betting has arisen as a result of the growth in financial derivatives during the past 35 years or so. These financial instruments were originally generated as a way of cutting the risks from exchange rate fluctuations and have spread to a wide range of risk. There are futures contracts and options on all sorts of commodities with the aim of cutting the risk of price increases. There is also speculation in other financial instruments such as interest rate swaps, stock market indices, sports and binary bets.
SPECULATE ON PRODUCTS WITHOUT OWNING THEM
This method of investment and speculation for profit can be enjoyed without ever owning the underlying financial product. They can be bought and sold and even sold and bought in order to gamble on the direction of the underlying market. It allows individual investors to take control of their own investments without the need to rely on a middle-man to make the trade and/or offer 'expert' advice.
CHEAPER THAN BUYING SHARES
A spread-bet position does not require you to buy or sell the real underlying asset. This has several benefits. If you believe that a company's mismanagement will translate into a falling share price or that the price of oil will fall due to the discovery of new oil fields you can benefit from the fall in price. To make money on the way down you can take "short" positions, and more easily and cheaply than in spot markets such as normal shares.
POINT SYSTEM AVOIDS CURRENCY DIFFERENCES ENABLING INTERNATIONAL TRADING
Over time spread betting firms have organized their product to enable their clients to speculate on most derivatives which used to be available only to professional traders. By providing clients with a single account based on units or points instead of currency values, spread betting firms have made it easy for clients to operate internationally. In other words, there is no currency risk when trading international markets with spread bets.
For example, if you live in London and place a spread bet that effectively buys a US-based share at $10 and sells it at $15, you get a 50% return, with each $ being quoted as a point. However, if you owned the share itself you would instead own it in dollars. Any return from that trade would be more or less than 50% depending on what happens to the value of the dollar during the same period.
The trades are settled in cash like most financial futures, with profits or losses accounted for on the balance of your account. If a client thinks that a share or product is going to go down in value he can benefit from the fall in price by taking a 'short' position. Alternatively, a short spread bet could be used to hedge against losses in a real share already owned, locking in a profit without incurring a tax liability.