Taking into account how popular spread betting has become, it is an often misunderstood form of trading.
The name, spread betting, is to a certain extent misleading. In many countries, for example South Africa, spread betting is called spread trading, a term that might be closer to the truth. With all the tools a trader has at his or her disposal to analyse the markets, and taking into account the fact that markets do tend to form certain trends, there are certainly more elements of trading than gambling involved here.
If it is not gambling, you might reasonably ask, what is spread betting? It is a contract whereby an investor bets on whether the price of a financial instrument will go up or down. If the investor is correct, their profit will be calculated in exactly the same way as if they actually bought or sold the particular instrument. The same is true if they are wrong and make a loss.
The big difference is that financial spread betting is a leveraged way of trading. You only have to put down a deposit, called a margin, and then you get control of an investment of 100-400 times the size of your deposit. The full profit on that investment (if there is one) will be yours.
The reverse is also true: if you incorrectly predict the price movement, the full loss is also yours. If you do not have a guaranteed stop loss, you could easily lose your full investment, or more, should you be wrong.
With spread betting you can trade a huge variety of markets. This includes shares, currencies, commodities and even share indexes, bonds and interest rates.
This holds certain benefits, but could also be dangerous. In the sense that it allows you to spread your risk and not put all your eggs in one basket, it is a good thing. On the other hand, you could also become a ‘trader of many and master of none’, ie you might trade a lot of instruments without really getting to know any of them properly.
The better option would probably be to specialise in a few instruments, for example, shares, currencies or commodities and get to know the way they behave well.
Unlike ordinary share trading, you do not directly pay commissions when you trade. The commission is already within the price, it is the difference between the buying and selling price: the so-called ‘spread’.
If you buy a ‘daily rolling contract’, spread betting company like ETX Capital will credit your account with a percentage of any dividends that are declared, but you have to pay interest on any trades kept open overnight.
On short trades, the reverse is true: you get interest on your open positions, but you have to pay in a percentage of any dividends that are declared.
Unlike ordinary share trading, any profits or losses you make with spread betting will not influence your tax liability in the UK. This is not true for all countries, so find out what the situation is in your country by contacting your tax adviser, also note that even in the UK this can differ/change depending on your own circumstances.
Spread betting is a geared investment option, it involves a high level of risk to your funds and you can incur losses that exceed your initial investment. Ensure that spread betting fits your trading needs as it may not be suitable for all classes of investor.
Before you start trading, make sure you are fully aware of all the risks involved. You should only speculate with funds you can afford to lose. Where necessary seek independent financial advice.
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