Why choose spread betting over traditional stock trading?
In the world of financial securities, traders have a wide choice of investment opportunities. Whether you prefer to invest in physical stocks or try your hand at spread betting is up to you, as both trading methods have strengths and weaknesses.
Here we look at some advantages that spread betting can have over traditional stock trading.
Avoid costs and fees
With spread betting you are not making a physical purchase or sale of a stock. Instead, you are betting on whether you think its price will move up or down.
Spread betting is therefore regulated differently than stock trading and classified as a form of gambling rather than trading.
As such, with spread betting you avoid many of the costs involved with traditional stock trading in the UK. You’ll avoid brokerage fees and the need to pay stamp duty or Capital Gains Tax on purchases and sales.
Because spread betting profits are not taxed in the UK, any money you make from spread betting is yours to keep in full. Obviously, you might not make a profit, and any losses from spread betting cannot be claimed as tax relief against other income. However, if you were physically buying shares you would have to pay the stamp duty reserve tax at the outset whether your trade goes on to make a profit or not.
Please note that spread betting is only tax-free under current UK tax law, which may change, and that ultimately your tax treatment will depend on your individual circumstances. For further detail on the tax treatment of spread betting, and your own circumstances, you should always seek independent advice.
Spread betting allows you to choose exactly how much exposure you want to take on, rather than buying a set number of shares at the full physical purchase price. For example, you can bet as little as £1 per point on the movement of a stock, and use Stop Loss orders to limit your losses and protect profits.
Go long or short
Going ‘short’, or betting on the value of an instrument to fall, was not easily available for entry-level stock traders until spread betting came along.
With spread betting, you can speculate on the market price of a stock falling rather than rising.
Every form of investment has risks
All types of trading and investment bring financial risk, some with a higher degree than others.
Financial spread betting does in theory have a relatively high degree of risk balance, since your losses can continue uncapped in the worst-case scenario. But in practice your risk can be mitigated through the use of Stop Losses, smart risk management, and by absorbing all the market information you can.
Published: 26 February 2019
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.