Why Do Investors Spread Bet?

Why Spread Bet?
Lots of ups… and downs!

Why Spread Bet?

Spread betting offers a range of positive reasons of why you should consider spreads as part of your investment portfolio:

  1. Tax Free Trading: A well publicised aspect to spread betting is that it is tax free in the UK and Ireland. Any profits you make are free of capital gains and income tax*
  2. No Commissions or Brokerage Fees: The vast majority of spread betting companies offer their service free of commissions / fees
  3. No Stamp Duty: Spread betting in the UK and Ireland is free of Stamp Duty
  4. Geared Trading: Spread betting is inherently a geared product. Hence the expression you can lose more than your initial investment (that’s the negative side to gearing). On the positive side a deposit of £250 will buy you the equivalent exposure of £2,500 in shares. That allows you to maximise your potential profits. Of course it also comes with a high level of risk. As the advert says: markets can move against you and you should trade only that which you can afford to lose
  5. Two Way Trading: This allows you to profit when markets rise or fall. Spread trading lets you Sell (go short of) a market, ie betting on the market to go down. Naturally you can also Buy (go long of) a market, ie bet on the market to go up. When markets are volatile this combination of being able to profit in a bull or bear market can work very well
  6. Limited Risk Orders: Stop Losses and Guaranteed Stop Loss Orders help you limit your risk
  7. Small Minimum Deposits and Dealing Sizes:
    • Most of the key spread betting companies let you start an account with minimum deposits of only £100-£200 ie far lower than that required by many other forms of investment
    • You can normally trade in small sizes, typically £1 / €1 / $1 per point
  8. Wide Product Range: A wide range of products and markets are available on most of the big spread betting company platforms, including:
    • Equities:
      • UK shares from Barclays and Shell to FTSE 250 share like Party Gaming and Debenhams
      • US shares from S&P500 companies like Google and Goldman Sachs to companies also listed in the Dow Jones 30 like Microsoft and JP Morgan
      • Many other shares from Denmark to Japan
    • Indices: eg FTSE 100, Dow 30, S&P 500, Nasdaq, Dax, Nikkei, Indian Nifty Fifity etc.
    • Forex: eg the Majors like GBP / USD, GBP / EUR, USD / JPY all the way to the Exotics like GBP / ZAR, USD / PLN, USD / MXN etc.
    • Commodities:
      • Energies: eg Brent Crude Oil, US Crude, Natural Gas etc.
      • Metals: eg Gold, Silver, Platinum etc.
      • Softs: eg Soyabeans, Wheat, Corn, Coffee etc.
    • Interest Rates: eg Eurodollar, Short Sterling etc
    • Bonds: eg UK Gilts, US T Bonds etc
    Trade what you know. If you know the Crude Oil or forex markets inside-out then financial spread betting allows you to focus purely on those markets.
  9. Freedom: Place your bets via mobile trading apps, over the phone or online
  10. Relaxed Trading Hours: A number of markets are available to trade outside of Normal Market Hours. Note that when you spread bet outside of normal market hours the spreads are often wider

Perfect Match or Regulators Nightmare?

Amongst other things, regulators like the Financial Conduct Authority are supposed to protect the retail investor (that’s you and me).

However, Day Trading and spread betting combine to provide short-term outlooks, leveraged products, buying and selling markets as well as investors trading markets on a hunch or newspaper headline. Not the regulators ideal.

Should you try day trading through spread betting? Of course that depends upon a lot of factors. Let us run you through some of the pitfalls with this type of investment.

Investors who are new to spread betting may want to consider avoiding Day Trading altogether. The short time periods can affect your trading judgement.

If you are not entirely clued up on spread betting then trading a leveraged product like spread betting over such a short period of time can quickly land you in trouble. Having a few positions going against you will only increase the pressure.

One way of taking the pressure off is to only trade a handful of positions at any time. Another key way of managing your trading is to trade with small stakes.

Should You Practice Day Trading?

A lot of people find trading via Virtual Demo Accounts a very different experience to trading with real money. Not a great surprise.

The whole emotional aspect is taken away.

Nevertheless you can always try trading with small stakes via accounts with an automatic stop loss through a spread betting company like Financial Spreads. There you can trade £1 per point and quickly rack up £50 – £100 profits / losses on each trade. That should remind you that you are not playing but without hurting you too much.

Greed Isn’t Good
Greed is good…not when it comes to serious trading. Why do you need to day trade? It does not suit many investors. Are you just being greedy? Perhaps you are too impatient to wait a week to make a profit? If that is the case then any sort of trading, be it through CFDs, stocks and shares, spread betting etc, may not be right for you.

Data, data and more data. Day Trading is also very difficult if you have a fulltime job where you are not sitting in front of the markets all day. If you are reliant on short term trends and you cannot see them then either you will:
  1. (probably) start losing and/or
  2. make sure you are watching the markets and your Day Job will suffer instead. As a rule I find it best not to mess around with your main source of income
Wide spreads are another negative although less so these days. If you are fixed on ‘Day Trading’ then beware of wide spreads and/or markets will little volatility. With either or both you can easily lose out to the spread itself. Eg the spread on a smaller AIM stock could be 19-22p ie approximately a 15% spread. Very wide. Those shares will have to move a lot before you can make a profit.

If the normal variation of shares on a single day is less than 5% then these shares will probably close around 20 to 21p. If you Sell the market at 19p or Buy it at 22p it is likely to close around 20 to 21p and you are still only likely to make a 1 or 2 point loss. And that is if the shares move in the right direction. If they move against then you could be 3 or 4 points down.

In short, Day Trading and spread betting are not a great combination for many people. That is probably why many investors choose to run their spread bets with an emphasis on short-term trading rather than day-trading. Trading spread bets over a few hours if needed but also over 20-30 days if that suits the position best.

The Upside to Using Spread Betting for Your Day Trading

But what about the positives? What are the benefits for the day traders who like the ease and convenience of spread betting?
  1. Many companies offer “daily rolling products” eg the FinancialSpreads.com FTSE Rolling Daily. Traditional daily spread bets would be closed out at the end of the day. However spread betting companies are always coming up with new products and variations. Daily Rolling Bets are now one of the most popular markets and are replacing the previously popular quarterly futures trades. In short, with daily rolling bets you benefit from the tight spreads and you can automatically roll your bet over to the next day without having to close and re-open the trade.

    • If you are a buyer there will be a small overnight charge
    • If you are a seller the spread betting company will even pay you a small overnight fee

  2. If you do decide to trade over short periods of time then you may be better off spread betting than share trading. With equities you have to pay Stamp Duty which is not applicable to spread bets*. With Stamp Duty currently at 0.5% in the UK and 1% in Ireland that soon adds up over a large number of trades
  3. Volatile markets. The FTSE 100, gold market, crude oil market etc are all volatile at the moment and you do need to make sure you place the correct trade. However with so many rapidly moving markets you do not need to worry about the width of the spread as much. Gold has traded a range of $100 over the last two months. The FTSE 100 is swinging 50-100 points on a daily basis. Crude Oil is currently trading a $9 dollar range. On a given day it can quite easily have a $2, $3 or even $5 range. So if the width of the crude oil spread is 5 cents with City Index and the market is moving 200 / 300+ cents in a single day then it is unlikely you will get caught out by the spread
  4. Unlike 5 years ago there is now a lot of competition amongst the spread betting companies and that has led to narrower spreads, particularly on the daily spot markets and daily rolling markets. Many companies offer a 1 or 2 point spread on their daily FTSE 100 markets
  5. Spread betting on daily markets is tax free. Whether you day trade and/or trade quarterly futures spread betting is still tax free*
  6. Day trading can be a negative for those who cannot sit in front of the markets all day but it can benefit those who are free one or more days a week. So you work part-time or perhaps you are retired or work weekends and therefore are free during the week when the markets are open? Of course that may mean you have less funds to trade so you do need to be extra careful. And of course trading still needs effort and discipline not just the time. But if you are motivated and have the time then it can be a useful extra form of tax free income
  7. There is already a large and established market for day trading shares but it is not as easy to gain exposure to markets like gold and crude oil or indices like the Dow Jones, FTSE 100 or Nikkei 255. With companies like ETX Capital you can easily and quickly gain exposure to these markets and trade many other Indices, Forex and Commodities markets. Naturally the US and Asian markets have different opening hours and note that the American markets do not all open at the same time, they have a staggered start

There are a number of pros and cons to this form of trading. Quick, tax free profits are always very tempting however make sure you understand the downside of each financial spread bet before you trade.

AuthorAlex Turner

Senior Editor, SpreadBetMagazine

Leave a Reply

Be the First to Comment!

Notify of