What is Spread Betting?
There are three different types of spread betting; financial, sport and novelty – but we’re only interested in financial spread betting or ‘spread trading’. Financial spread betting is an accessible form of traditional market trading, it allows you to bet on the movement of a market without having to purchase or sell stock. This means that there are no transaction fees and bets can be made from very small deposits (£50 – £100). There are also tax benefits that come with spread betting over trading which is covered in a later section.
How does a spread bet work?
Every spread betting company provides you with an interactive platform that allows you to browse markets, open/close bets and see price movements all in real time and with real market data.
To make a bet, you simply have to navigate to the market that you want to open a position in i.e. a commodity (gold), share price (Microsoft) or index (FTSE 100) and choose to either buy or sell that particular market. Remember, you are not actually buying or selling anything, it is simply the term that is used when placing a bet.
For example, if you thought Facebook stock had become underpriced and was going to begin rising, you would ‘buy’ at the current price in the hope that the share value rises; you would then ‘sell’ to make a gain. Alternatively, if you thought Facebook stock was going to continue to plummet then you would ‘sell’ at the current price and ‘buy’ when the price fell – this is also known as ‘going short’.
Do I need to deposit to spread bet?
Spread betting is not a risk-free investment. In fact the risks can be incredibly high and are potentially devastating if not understood properly.
For this reason, many spread betting companies offer a ‘demo account’ for new players. These accounts are free to set up and do not require a deposit. A demo account will allow you to spread bet exactly how you would with a real account with real market data, however you will face zero risk as the money you bet is virtual.
If you are familiar with the basics of spread betting and understand the risks, then setting up a real money account is simple but often requires a few background checks when registering. Deposits can be made from as little as £50 and depositing options vary from platform to platform.
What makes spread betting different from trading?
Spread betting and traditional market trading are both very similar. In order to gain, the trader has to make consistently accurate predictions about the movement of a market price and be able to open and close his or her positions at the right time.
While trading and spread betting share a lot in common, the key differences are summed up below.
|Feature||Spread Betting||Traditional Trading|
|Tax exempt from Capital Gains||✓|
|Exempt from Stamp Duty||✓|
|Ability to Leverage Trades||✓|
|Ability to Trade Long and Short||✓|
|Physical Ownership of the Stock/Commodity/Currency||✓|
Transactions in traditional market trading will always have a cost attached to them – to buy or sell a market, you will often have to go through a broker who arranges the order and charges a transaction fee that can range from anywhere between £1.50 and £25 per trade.
Transactions in spread betting do not have a cost attached them. In spread betting you are able to open as many positions as you like without having to pay any fees. There are no brokers in spread betting and any market positions are dealt with between the trader and the spread betting company directly. However, spread betting gets its name from the ‘spread’, which is an effective cost of opening any trade.
Tax laws in spread betting are non-existent. No matter how much profit you make, you will not be taxed a penny. The reason for this is that spread betting is officially recognised as gambling and UK law does not permit the taxation of profits through gambling.
Tax laws for traditional market trading are in place and any profits are subject to capital gains tax. However any losses are deductible from any other capital gains that you might have. The tax laws for traditional market trading are similar to any other investment.