For standard spread betting though there is hardly any difference… The general consensus appears to be that if intending to hold in the long term (years), then shares are the way forward but possibly spread bets makes more sense for shorter term trading.
“But why would trade spread bets as opposed to just buying shares? Well, it is true that the losses can exceed the initial stake but gains can be magnified as well. Transactions are considered bets so profits are not subject to CGT or stamp duty as they would have been had you executed the same trade by buying the underlying stock. In addition, with spread betting you can profit when prices are falling or rising in value.”
If you just buy the physical shares it can be expensive business as you have break-even costs. Spread betting is probably a cheaper way to do it even though spreads are slightly larger. It’s the stamp duty that is really the killer with buying physical shares, the costs diminish as size increases.
For example (very simplified)
Shares Trading Example
Bid – 304p
Offer – 302p
You buy 10,000 shares at 304p – cash value £30,400
Your commission is £9.95, plus your stamp duty, PTM levy etc. If you were to sell straightaway, then your holding would worth say £30,200 minus all your dealing costs. If the share price falls your shares are worth £100 less for every point they fall and £100 more every point they rise.
After that you pay tax on any gains you make, and stamp duty and dealing costs again.
Spread Bet Equivalent
Take out a spread bet at £100 a point and the only costs are in the spread so if the spread is 300 to 302 then the trade has cost you £200.
No tax, PTM, broker’s commission… etc.
Difference is you can expose yourself to £30,200 of liability with a very small deposit, whereas you would need the cash if you actually bought the shares. Where people mess up is by overextending themselves and getting greedy, one day it’ll go wrong and they’re left with a massive loss.
The problem with spread betting is that it is it is more addictive; and because you can see your losses and wins go up and down second by second, it is more tempting to overtrade. The trick is discipline, discipline and discipline.
All IMO, DYOR…
If you intend to make more than 10k profit each year – then it is probably cheaper to spread bet, particularly for higher rate tax payers who would have to give back 40% above this.
Note: I do spreads and shares. I have a completely different attitude to both – spreads I chop and change (generally speaking I avoid anything with a large spread which makes life a lot easier), shares I hang on to and have much wider stops – it takes quite a lot to get me out of a share actually – I’m very much a long termer on these.
“Spread betting on shorter-time frames can work out a lot cheaper than shares dealing because of the stamp duty exemption, while the leverage allows traders to magnify their gains.”
My investments are all in shares. I use spreadbetting for trading volatility, as there is no commission or stamp duty (just a wider spread) but also there is no capital gains tax to worry about and I try to use the whole allowance on my investments. I do not do spreadbetting all that much thought to be honest. Some people trade purely on charts, which is fine for them, but I just cannot bring myself to commit my money without at least knowing something about the company and what is going on to create the volatility, which takes quite a lot in research
Spreadbetting is quite effective as long as you treat spread betting position as follows-:
- on each trade I ask myself would I be comfortable actually owning the amount of shares in this company based on my leveraged position and therefore, make sure I never over leverage
- not to treat each trade as a short-term position (6-9 month positions)
- keep any stop losses a significant distance away the same as you would if you owned the stock
- keep my finger away from the sell button and let my profits roll
- make sure that I am able to cover all my positions/margin calls if they go against me
The tax free gains is a major incentive for me. I am aware of stats suggesting that 80% of spreadbetters lose money but maybe I have so far been fortunate enough to be a part of the lucky 10%. I am touching a wooden table as I type this.