What Else Makes it so Popular? Advantages and Dangers

Financial spread betting comes with a number of benefits. Profits from spread betting are tax-free, because they are classified as bets – although the industry is still regulated by the FSA, as opposed to the Gambling Commission. However, even without the tax advantages (which incidentally means that you don’t have to maintain paperwork!), spread trading has a number of things going for it. Here are some of the benefits and advantages of spread betting -:

Key Advantages of Spread Betting

“Spreadbets and CFDs were designed as a tax arbitrage product and are extremely effective in doing so.”

  • It is extremely easy to open and close trades on-line. Spread trading companies have invested heavily in user-friendly web sites to encourage volume on-line business.
  • It is easy to place and move stop losses. Usually this can be done on-line as well.
  • You can determine what size positions to have and you can increase and decrease them if you wish. You can also start with VERY small positions while you learn. This is a major point.
  • You do not have to tie up large amounts of capital to be able to trade worthwhile positions. This is because spread betting allows you to trade on margin. So although a position of £10 will allow you exposure to the price movement of 1,000 shares, you only need a fraction of the value of the underlying shares to open the position. In practice this means that the spread betting provider is lending you the value of a proportion of your trade so you only need to deposit a percentage amounts, normally between 2% and 10% of the total market exposure depending on the market you want to trade. In this way you make your money work harder by utilising leverage while still taking the full amount of gains or losses from the trade.
  • You can go short as easy as you go long (bet on prices falling as well as rising). This is a big advantage over buying shares where you can only make money if they go up in price. The way the Japanese earthquake affected the financial markets is one example of how spreadbetters could have exploited this. While an investor holding stocks via a conventional stock broker may have witnessed a sharp fall in his portfolio, if you’d seen the fall coming, you could have used a spread bet to make money.
  • It is very easy and quick to set up an account. With online trading platforms allowing you access to truly global financial markets, you will be able to find trading opportunities 24 hours a day, 5 days a week. You can trade many of these markets from 23.00 on a Sunday night through to 21.15 on a Friday evening (UK time).
  • You can trade a massive variety of shares and indices (home market and overseas) as well as currencies, commodities, metals, interest rates and bonds. You can also trade more unusual markets like the difference (broadening or narrowing) between major indices. The most popular being the FTSE/Dow difference.
  • Many spread betting instruments are open for trading at times that are not available on individual exchanges or professional platforms. Most spread betting providers for instance will quote Forex pairs from Sunday evening to Friday evening (continuously) and offer a market in UK, US, German and Far Eastern indices 24 hours a day.
  • By creating a financial spread betting account you can follow all these markets on one screen using just a single spread betting provider to get all your prices and news. Additionally, you won’t need to switch accounts when you need to move from your stock trades to currency trading.
  • In addition, by opening a spread betting account, you are dealing in all these markets in sterling. You don’t have to worry about any currency risk you might be getting exposed to by buying a share listed on a foreign market.
  • You can use spread trading to ‘hedge’ a buy and hold investment. In other words if you think your portfolio of shares will fall, instead of selling them you can go short on the same shares or the Index by spread trading. This means that your spread trade makes money on the way down to offset your losses on the shares.
  • One important advantage with using spreadbets rather than actual shares is the lack of additional dealing costs when exiting in stages (for instance I may dump say a third on a 5% fall, another third if down 10% and let go of the final third if it drops 15%. Or whatever preferred settings per stock). That way I feel I’ve given the stock plenty of opportunity to come good before totally giving it the boot. It eases the psychological burden of exiting in one go, when unsure it’s the right thing. You can do a similar routine when dealing shares, but then you have to build the costs into the proposed exit levels. And of course with spreadbets, you could also buy (or re-buy) in stages too.
  • Many Investment Clubs should consider the increased flexibility, speed of transaction and gearing that spread trading offers.

No taxes on spread betting winnings eliminates the need for paper work tax filing!

Dangers and Disadvantages of Spread Betting

  • Trades are leveraged which means that losses can quickly exceed your initial deposit; especially if you don’t make use of stops.
  • Winnings are tax-free but you cannot offset past losses against future gains as you can with shares or CFDs.
  • Unlike shares there are holding costs (financing charges) if you keep rolling daily positions overnight.
  • Spread betting appeals to the ‘devil in you’. Betting on stock/index/commodity price movements over hours, days, weeks is very hard to get right in practice. Markets are not really efficient and may take a long time to correct any pricing anomalies or correct an overvalued or undervalued price.
  • Spread betting appeals to the ‘devil in you’. Betting on stock/index/commodity asset price movements over short period times time like hours, days and even weeks is very hard to get right in practice. Markets are not really efficient and may take a long time to correct any pricing anomalies or correct an overvalued or undervalued price. Leveraged trading may also cause you to get obsessed over every ‘technical indicator’ and ‘new item’ which is not at all conducive to good health or sanity.
  • With stocks you can keep holding them through the ups and downs – as long as you have a long-term investment perspective. With spreadbets you must make use of stop losses to limit the downside risk so this flexibility is somewhat reduced.

Finally, betting on share price movements promotes the devil in you. What I mean by this is that you change from being an owner of a tangible business who perhaps keeps up to speed with developments from time to time whilst getting on with your ‘normal life’. Spread betting and CFDs cause you to obsess over every ‘indicator’ and every news item, which is not at all conducive to good health or sanity.

“In spread betting, you can also customise your bets and exposure to your means. If you want to trade £200 a point, if you’ve got the money in the account, you can do that; or you can trade £2 a point – and anywhere in between. Spread betting providers may even allow spreadbets of up to £10,000 a point providing уου have sufficient trading capital in уουr account tο cover potential losses.”