Spread Betting: Benefits & Risks
Advantages of spread betting
There are many reasons why financial spread betting with InterTrader.com might appeal to you:
Wide range of products
InterTrader.com offers you thousands of different markets to trade including shares, commodities, metals, currencies and indices. We quote Futures contracts as well as Rolling Daily contracts, and you can choose to trade all your markets in the same currency. For further information on the full range of markets we offer, please see our Market Info Tables.
No commission or fees
InterTrader.com does not charge any commission or brokerage fees when you open and close trades. We make our profit from the spreads that we apply. There are also no fees for holding an account, so you can leave your account with a zero cash balance at no cost.
Trade on margin
Trading on margin greatly increases the leverage of your investment capital, as your initial outlay reflects only a fraction of your total exposure on a market.
For example, if I buy 500 shares of HSBC at 800p, my total exposure (investment) is £4000. The equivalent in a spread bet would be to buy £5 per point at 800p, with the same total exposure of £4000. You do not however need £4000 in your InterTrader.com account in order to open the position. You only need a small percentage, in this case from just 3% or £120. With only £120 of margin required to open a trade worth £4000, this means that you have freed up £3880 of your capital to put to use elsewhere.
Any capital gains you make from financial spread betting are completely free of Capital Gains and Income Tax (for UK residents).
No stamp duty*
Financial spread betting is exempt from UK stamp duty.
An efficient alternative to traditional stockbroking
The following table illustrates how an investment held for 30 days might compare to the equivalent spread bet:
|Buy 10,000 shares||@ 140p||Buy £100 per point||@ 140.1p|
|Cash outlay||£14,000||Cash outlay||(£1401)|
|Sell 10,000 shares||@ 200p||Sell £100 per point||@ 199.9p|
|Gross profit||£6000||Gross profit||£5980|
|Stamp duty||(£70)||Stamp duty||£0|
|Commission (buy/sell)||(£100)||Commission (buy/sell)||£0|
|Tax @ 18%||(£1080)||Tax @ 18%||£0|
|Overnight financing||£0||Overnight financing||(£90)|
|Net profit||£4750||Net profit||£5890|
|Return on Capital Employed||34%||Return on Capital Employed||420%|
|ROCE working: 4750 ÷ 14,000 x 100%||ROCE working: 5890 ÷ 1401 x 100%|
Remember that, although your initial outlay with a spread bet is £1401, you can lose more than your initial deposit if the market gaps through your stop level, unless you choose to make your stop guaranteed. The other benefit of doing this trade as a spread bet is that you've freed up almost £12,600 of spare capital to use elsewhere or remain in the bank earning interest.
Financial spread betting is a high-risk activity, but at InterTrader.com we want you to enjoy your trading experience. We automatically generate a stop-loss for each position you open, so that your financial risk is significantly reduced. You can amend your stop level to move it either closer to your level of entry or further away (subject to available funds being on your account). Note that stops are subject to slippage and market gaps unless you specify for your stop to be guaranteed. Find out more about Guaranteed Stops.
Bull or bear
One of the most obvious advantages of spread betting is the opportunity to go short of shares and other financial instruments such as commodities, currencies and indices. You can therefore profit from both rising and falling markets.
A regulated industry
Financial spread betting is an industry which is tightly regulated by the Financial Conduct Authority (FCA). Our regulation by the FCA means that we must abide by strict rules and regulations designed for your protection.
Stake size of your choice
Spread betting caters to traders at all levels, allowing you to trade in sizes smaller than those usually available in the underlying market.
Trade in one currency
Unlike some other financial services, financial spread betting allows you to conduct all your transactions in one currency avoiding costly currency exchange fees.
What are the risks?
Although you can make substantial profits from financial spread betting, it is important to note that it carries a high level of risk to your capital, so you should only trade with money you can afford to lose. InterTrader.com has a policy of attempting to limit client losses by applying an automatic stop-loss to each trade you place, but you may lose more than your initial deposit if the market gaps through your stop level, unless you specify to make your stop guaranteed.
For example, margin trading can free up a large percentage of your capital, as in the HSBC example above, but you are still liable to any unforeseen adverse market movements. Although in this example you would only need £120 on deposit for a £5 position in HSBC at 800p, in an extreme scenario you could still lose £4000 (for example, if HSBC went bust overnight and your stop was not guaranteed).
Before you apply for an account, please ensure that you familiarise yourself with the risks involved and that spread betting matches your investment objectives. You may wish to seek independent financial advice before applying for an account. If you are new to trading, we recommend that prior to applying for a Live Trading Account you open an online Demo Account and follow our online User Manual. If you want to know more about the risks involved, please read our full Risk Warning.
*UK taxpayers only. Tax treatment depends on the individual circumstances of each client and may change in the future.