What is Spread Betting and Should you try it?
If you live in the UK, you may have recently heard of spread betting. But if you’re not quite sure what it is, you’re not alone. Financial spread betting allows you to bet on different price movements in hundreds of markets without having to actually buy the product. Because you don’t actually buy the asset, you’re betting on a potential future and whether the price of the product will increase or decrease in value.
When you’re spread betting you either buy or sell an amount depending on the point movement which is known as your stake. Every time the product’s price moves a point in your favour you then get multiples of your stake. However if the price moves against you, you then lose multiples of your stake.
Your loss or profit will be the difference (spread) between your opening bet and closing bet, which is also multiplied by the value per each point of your bet.
It’s important to remember that you’ll also be paying daily funding charges for products which aren’t futures contracts. This shows that it’s a daily product which was moved to the next day, and isn’t a futures product which means the spread would be larger in order to incorporate the costs.
CFDs are liable for dividend adjustments because when a stock pays a dividend it affects how much the share costs and the index it’s associated with. Each stock usually pays a dividend twice per year, however since you don’t actually own the shares (you’re betting on what could happen), you’re simply adjusted for the dividend amount in order to counteract the movement of the price. This means that you aren’t affected by dividends if you’re trading a derivative product.
Is Spread Betting for you?
Spread betting is almost like CFD trading, however with spread betting you can bet on potential price movements without having to actually purchase the stock. One of the biggest advantages of spread betting is also the fact that it’s a tax free alternative when it comes to trading, and you won’t need to pay tax on any profits. While you usually need to pay stamp duty on share trading, you get to skip this step when spread betting.
If you’re an active trader and you’re looking for profits which are tax free, spread betting could be ideal for you. With spread betting you also have the opportunity to take advantage of both falling and rising markets. If you have a feeling the market will fall, you can then place a spread bet in order to sell the product and then try to buy it later on at a lower price. Although if you do sell the product and the price increases, you may then lose money.
When you’re spread betting you’re also using margin. This allows you to have more opportunities to use your capital and you can open more positions than you could if you had to fund the whole value of the position by yourself.