Most successful spread betting converts swear that once you get the hang of spread betting and get used to the process of buying and selling, spread betting is actually easier than dealing in the conventional way.
We will assess some of the main advantages of spread betting first, and then take a look at the possible disadvantages spread betting can bring.
Advantages of spread betting
Tax Free Gains – yes you read right, TAX FREE. While we don’t suggest you enter into the spread betting game simply to avoid the tax man, spread betting can be a bit of a tax sweetener. The gains you get out of your spread betting will not attract capital gains tax (CGT) or income tax. This differs to normal stock market trading, where all profits will be taxed under CGT laws relevant to your jurisdiction. Unfortunately, any capital losses can not be used as a deduction from other capital gains.
No Stamp Duty – Stamp duty does apply to traditionally stock trading, so if you’re spread betting you will currently be stamp duty free.
Leverage – the potential to turn a low amount of cash into a lot is potentially much higher in a spread betting environment than a traditional stock trading, due to the leverage employed. With spread betting you are trading on margin, which basically means you don’t have to fork out for the full cost of the investment upfront, you pay a deposit. Trading on a margin is great when you wish to make a large investment without having the entire amount of capital injection required upfront, but while the potential gains are higher, so are the potential losses.
Buys/Sells trades can be staggered – brokerage fees can be expensive in traditional stock trading and it can be costly making staggered exits from your investments without paying brokerage fees each time. Within a spread betting scenario, you can exit the investment in phases without paying duplicate brokerage. Why? The costs of spread betting is built into the price/spread at the outset, this means if there are buy and sell transaction at certain phases throughout, you will only pay once, not each time you trade.
Stop Loss and Limit Order – It’s impossible for a trader to watch every price tick and close their trade once it hits a specific price, so both Stop Loss and Limit Orders are used to automatically close a trade once it hits the investors target price. For many investors, stop loss and limit orders provide some sense of “security” and avoids you needing to be glued to the screen 24/7.
Open 24/7 – As the trading platforms are accessible online, you can generally place orders 24/7, to be executed when the exchanges open.
Minimise currency risk – Many spread betting firms allow you to choose a currency which you can trade in, which eliminates the hassle of settling a trade in another currency and having to hedge the FX risk. If you work in £’s you can bet in per point in sterling on international shares denominated in another currency – your spread betting company will take care of all of the messy currency conversions.
Easy sign-up – Signing up with spread betting companies is usually done with ease online and takes about 15 minutes to complete. You are also required to send in a few forms of ID, before you can start spread betting.
Disadvantages of spread betting
Leverage – As it has been mentioned in the advantages, leverage can work against you. A spread bettor can lose more than their initial capital injection. Often than not, when first placing a spread bet it is likely you will underestimate the impact of your losses. While most spread betting compatriots only make this mistake once, most do make this mistake when starting out. It’s important that all the risks are understood before placing a trade. There are tools which can be used to minimise the downside risk such as Stop Losses.
Generally not a long term trading option – traditional stock trading is more of a long term strategy than spread betting. Spread betting investors can roll over their spread betting investment, but they have to pay costs to enter in a new spread betting at each expiry date. The costs of rolling these bets can add up over time and erode profits.