What is Financial Spread Betting?
Financial Spread Betting allows you, an investor, to speculate on the directional movement of the price of a financial instrument, without requiring you to physically own the instrument or to physically settle it. In order to trade, you have to decide the amount that you wish to trade on each point movement of the underlying instrument. Every point movement that the price of the underlying instrument moves in your favour, will result in a profit for you. In contrast, every point movement of the price of the underlying instrument against you, will result in a loss for you.
Advantages of Spread Betting
- No Stamp duty is payable (saving 0.5% compared to a traditional share purchase).
- Tax Free Profits: Profits on spread betting are not subject to capital gains tax.
- No direct commissions or fees are paid to the spread betting company.
- You can profit from falling or rising markets.
- They are traded on margin therefore bets can be placed with a relatively small initial outlay.
- A single account can give you Access to far greater range of financial markets.
- You can limit your risk using a ‘Stop Loss’.
- The ability to place very small bets, some companies let you place a trade of as low as 1p per point.
Disadvantages of Spread Betting
- Some markets may be very volatile and unless you place a stop loss you could incur very large losses if your position moves against you.
- It is less suited to the long term investor,if you hold a bet open over a long period of time the costs associated increase and it may be more beneficial to have bought the underlying asset.
- You have no rights as an investor, including no voting rights and you will not benefit from dividends.
What can I trade?
Because you are not actually buying or selling the actual underlying instrument. the range of instruments that you ‘bet’ on can be far greater than simply underlying shares.
You can bet on the spread bet of:
- Stock market indices such as the FTSE or NASDAQ.
- Individual shares from the FTSE 100 and FTSE 250, but also from leading US and European shares.
- Currencies, FX.
- Commodities such as metals and oil.
- Interest Rates both short term and long term.
- Futures and options.
How does a Spread Bet work?
A spread bet is a bet on the future movement of an underlying instrument. In basic terms if you believe the underlying instrument is going to rise you place a buy bet, if you believe the underlying instrument is going to fall you place a sell bet. Unlike ordinary share trading you can befit from falling as well as rising shares or other financial instruments.
A spread betting company will quote you two prices for any underlying instrument a Bid (the price that you can sell at) and a ‘offer’ just like you would for a normal equity (the price that you can buy at)the difference between these is known as the spread.
The movement of the underlying instrument is measured in points eg. For equities 1 point = 1 pence for indices usually 1 point = £1 and you can place a bet of any value against every point movement in the underlying i.e. £1 per point, £5 per point or £10 per point etc.
To close a bet you simply place an opposite bet on the specific instrument at the same £ per point. To close a buy bet you sell at the current quote and to close a sell bet you buy at the current quote.
Therefore the profit or loss that you make is the points difference between the opening bet and the closing bet multiplied by the value of your bet per point (i.e. £1 per point, £5 per point or £10 per point etc.)
When I am Spread Betting, am I entitled to any ownership of the underlying asset?
When you trade on the price of the financial instruments, you do not actually own the underlying asset. However, you are entitled to some of the benefits, such as dividends, rights issues etc, as if you were an owner of the underlying asset. The main difference is that you will not receive any voting rights on individual equities.
What charges should I expect?
Charges are made when you hold a long trade open overnight. This is a financing charge to hold the trade open. In reverse, you will receive a credit for short trades held open overnight.
What are the margin requirements for Spread Betting?
For each of your open trades, you are required to place a deposit known as ‘margin’. Because you do not have to pay the full amount of your trade size, Spread Betting allows you to increase the amount of exposure to a financial instrument through leverage. This means you can place a larger trade than if you traded using simply the funds you placed in your account. Leverage has the effect of magnifying the profits or losses on your trading capital. The maximum amount of leverage available to you varies with the instrument you are trading.
What is the minimum account maintenance balance?
There is no minimum account balance which is pre-set. However, you must maintain sufficient deposited funds in your account to cover the NTR for your open positions, or you will face liquidation of one or more positions.
What is the minimum stake size?
The minimum stake size depends on the instrument, and is typically one unit for any equity, index, commodity or bullion. See Market Info for further details of minimum stake sizes with us.