This article describes spread betting trading, explaining what it is and how it can be used as an investment vehicle.
Spread betting is a way of trading financial markets. Instead of buying or selling shares through your stockbroker you can use a spread betting provider to access not only shares but also a full range of markets including bonds, interest rates, currencies, commodities, and many others.
Spread betting is very simple and clear and you can do what you do at your stockbroker, with the advantage of it being tax-free, not paying stump duty, and giving some leverage to your funds.
The best way to understand how this works is with the aid of an example. Let’s say you plan to buy Burberry shares. Currently Burberry has its shares valued at 1,310p each. Your money allows you to buy 1,000 for a total cost of £13,100. In spread betting you don’t really buy the shares. You are instead staking an amount per point movement. In this case you will place a stake of £10 per point. Each time Burberry moves 1 point you gain or lose £10.
So now it’s time to compare both positions. If Burberry rises to 1,400p, you will have in your stockbroker account £14,000. Your profit is this amount less your initial outlay that is exactly £900. In terms of spread betting, the shares rose 90 points. Since you have put £10 per point, you will profit £900. As you can see, the final result is similar.
If you carefully look at what you are doing you see that at £10 per point, your full position is equal to £13,100 as in the stockbroker case. So both are similar. The advantages, as I referred some of them before, are in the spread betting activity being tax-free, not paying stamp duty for UK shares, being leveraged, easy to understand, and usually giving you access to a much wider range of markets.
Financial spread betting is a very effective way of trading but it is not suitable to everyone. You should evaluate if you are willing to take the risks of if you are more tailored for lower risk investments. For more information you can take a look at my spread betting explained guide.
