The UK is a world leader in financial services and one of the newest growth segments in that market is Spread Betting which, from small beginnings in the 1980s, is now growing at a blistering pace.
Some operators of spread betting platforms are no so large that they are now listed on the London Stockmarket.
Circumstances vary from country to country but the rationale behind this form of trading is the opportunity to leverage up a small amount of money to control a disproportionately large quantity of shares or other financial instruments in a very tax efficient manner.( In the UK, bets are free of both stamp duty and Capital Gains Tax). It also affords the opportunity to make money from something that is falling in price. On the downside, the leverage element ensures that any losses are also disproportionately large compared with the sum of money laid out.
Although technically classed as gambling, financial spread betting is not regulated in the UK by the Gambling Commission but by the Financial Services Authority who are probably more inclined to regard it as speculation.
Spread betting can be used to back one’s hunches in all sorts of financial instruments such as shares, commodities and currencies. Many investors use it to hedge fully paid up investments in these markets.
In its simplest form, a spread bet is a wager that an instrument is going to go up or down in price by a sufficient margin to cover the “spread” or difference between the buying and selling price. This margin is the profit accruing to the operator of the spread betting platform which has been selected. The company concerned is effectively acting like a bookmaker and undertaking to honor your bet if it comes good.
To illustrate how a spread bet might work in practice, let’s assume our bettor expects Vodafone shares to rise from their current price of 170p to sell and 171p to buy. If he was to buy, say, 1,000 shares in the stockmarket, this would cost £17,100 plus stamp duty and broker’s commission, let’s say a total of £17,200.
Instead, our spread bettor elects to “control” the same amount of shares using a spread bet. If his chosen spread betting firm is quoting 170p to sell and 171p to buy, he opens a Buy bet at 171p for £100 per point. If the shareprice subsequently moves to 180 p to sell, anyone who had physically bought 1,000 shares at 172p including costs, would have made £800 profit on a £17,200 outlay or 4.6 %.
Meanwhile, our intrepid spread bettor has cleared £900. The spread betting firm he used would have asked for a deposit or “ margin “ of the underlying value to cover any losses and, let’s assume on a very marketable share like Vodafone, this margin requirement was 10 % or £ 1,710. He has therefore cleared a very healthy 53% return on his actual outlay without incurring any tax liability. This clearly demonstrates the benefits of leverage or “gearing” when things go well.
The other side of the coin is that, if the shareprice had fallen by 10% instead, the spread bettor would either have to choose to accept a loss of £1,710 or deposit another 10% margin in anticipation of a price recovery.
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