Financial Spread Betting

With increased popularity among traders and investors alike, spread bets and CFDs are no longer the domain of big financial institutions. People who previously traded options, warrants and other forms of derivatives have now embraced spread betting (UK) and CFDs (pretty much elsewhere). As we will see CFDs and spreadbets are very much similar products; however for now we will focus on financial spread betting.

Spread betting offers a simple and effective method of backing your own judgement and betting on movements in financial markets. It is a tax-efficient* method of trading, and allows you to profit from a falling market just as easily as a rising one.

Spread betting is a highly geared investment, in which you don’t have to cough up anything like the full price of the shares. But not only that! Spread betting also allows you access to thousands of different financial instruments, from UK stocks and world indices to commodities and forex pairs. Spread bets have proved to be a very useful product not just for traders or speculators but also investors like me.

Trading spread betting not only offers tax advantages and low barriers to entry but its points-based methodology also makes it easier to understand and trade a multitude of markets. These include:

• Shares e.g. Vodafone
• Indices e.g. FTSE 100, Dow Jones
• Foreign exchange, e.g. EUR/USD
• Commodities, e.g. coffee, cocoa, oil
• Interest rates
• Bullion

The high degree of gearing or leverage is a particular feature of this type of transaction. This stems from the margining system applicable to such bets which generally involves a comparatively modest deposit or margin in terms of the overall contract value, so that a relatively small movement in the underlying market can have a disproportionately dramatic effect on your bet. If the underlying market movement is in your favour, you may achieve a good profit, but an equally small adverse market movement cannot only quickly result in the loss of your entire deposit, but may also exposure you to a large additional loss unless you enter into a limited liability contract with the firm.

Of course there is certainly room for more growth in the UK spread betting market and we are confident that with increased exposure and education the retail demand for these products will grow.

In the UK, spread betting provides the investor with a tax efficient opportunity to speculate on fluctuations in the prices of thousands of global market instruments. These include:

• Shares e.g. Vodafone
• Indices e.g. FTSE 100, Dow Jones
• Foreign exchange, e.g. EUR/USD
• Commodities, e.g. coffee, cocoa, oil
• Interest rates
• Bullion

Basically, you actually place a bet on the outcome of a financial ‘situation’ – so, rather than buying sterling/selling dollars to back your belief that the pound sterling will increase in value over a given period against the Greenback, you bet that this will happen.

The effect is that any profits that are derived are taxed as a bet, not as a financial transaction. In most jurisdictions, this is very advantageous – as long as you are making profits! Any losses, however, are just money thrown away and cannot be offset in any way as you may be able to with a capital loss, for instance.

Spread betting offers some advantages over more traditional investment methods

• Tax free profits
• Large profit opportunities (but also potential for large losses)
• The power of margin, e.g. leveraging your trade to gain a larger exposure to the market than you would if playing the market by traditional means
• International market exposure but with no currency risk

Engaging in spread betting can carry a high risk. As these transactions differ markedly from normal bets you should not engage in this form of betting unless you understand the nature of the transaction you are entering into and the true extent of your exposure to the risk of loss. The amount that you may win or lose will vary according to the extent of the fluctuations in the price of the index on which the bet is based instead of a sum predeterminable when a normal bet is placed.

If you do this consistently, most tax offices will then regard this as an income stream and you will be taxed accordingly (seek financial advice).

Remember positions do not need to be large, and a less leveraged position (i.e. a small amount of $ per ‘point’ moved by the underlying instrument on which you are betting) means you can have exposure to a situation on which you hold a view without losing too much. Most spread betting houses offer guaranteed stop losses (for a small consideration!), which means you can always guarantee the maximum amount you are willing to bet even in a volatile market.

Is Spread Betting for me?

Spread betting is right for investors who have a great deal of knowledge and understanding of equities and have solid self discipline. The practice is a very risky one, so you will need to determine your risk tolerance before you start to place bets. It is always important to remember not to place bets that you cannot afford to lose, so the risk you take is dependent on your experience and knowledge. If you are just starting out it is best to start with a small amount of money. If you think that you have the right amount of knowledge and risk tolerance, then spread betting is right for you.

Spread betting is a service that is predominately available through an online application or platform, all of which are heavily regulated by the FSA in the UK or the financial authorities where you live. All spread betting providers will allow you to open a demo account for you to play around with first, allowing you to gain the experience before betting with your own money.

The best way to get to grips with spread betting is to open a practice account and then experiment without risking any real money.

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Financial Spread Betting takes the financial market traded products into the gambling arena and in fact creates a simple trading platform which can be much more profitable and dangerous at the same time but most importantly – simple.
Betting on financial spreads you can actually place bets on stocks, shares, commodities (such as oil, gas, silver, wheat) and more and you can also bet on forex (currency exchange) and spread FTSE.

Financial spread betting is mainly common in the United Kingdom where it was originated in the form of sports spread betting and evolved into the financial market due to the demand.

Forex is still the leader in online financial trading, however financial spread betting is catching up simplifying forex and the financial market and merging gambling to it.

A spread bet is a bet on pre determined odds given by the financial spread betting company. The spread is a high and low margin and the gambler has to decide (bet) on whether the value will go above or below that margin and place the bet accordingly.

The bet is settled at a given time as financial spread betting is done live at the same time the actual trading takes place. Read the Mr Spread Betting guide and find out how easy is to get started in, however it’s also very risky. It leverages the bet into amounts that the gambler might not be aware once placing the bet. This is why there’s an option to place a stop loss on the bet and in that case if the bet goes the wrong way around there’s a maximum potential loss for the gambler. Usually it’s the original total investment made by the gambler.

In any way the gambler has to cover for potential losses before placing the bet.
There’s no limit to how much you can earn in financial spread betting furthermore in the United Kingdom where it is licensed and regulated there’s no tax on winnings.

There are many financial spread betting service providers and aside from offering real money financial betting, they also offer practice demo modes in which the gambler can learn and get started with financial spread betting before diving to the deep water.