In spread betting the trader places a bet if the market will go up or down. There is no acquiring done of any instrument or its contract for difference, rather simply betting on the market trends. The profits or losses are determined by the changes in value and not by the closing price. Spread Betting is mostly done by UK and Ireland residents, as profits from spread betting are tax free in those countries. As the trader is ‘betting’ per point move, it means this type of trading falls outside the scope of Capital Gains Tax or stamp duty when compared to other types of trading.
When Spread Betting you can trade all the same financial instruments as a standard forex or CFD account including forex pairs, commodities, indices or stocks.
How to conduct Spread Betting
Spread Betting requires the same level of research, analysis and knowledge as any other type of trading. The trader decides to buy (go long) or sell (go short) the financial instrument in question, and should the market react in the manner he predicted profits will be gained.
For example, if we believe that the price of Apple shares is going to rise in price, we can open a buy bet on Apple. We then decide how much we want to bet per point move. A point move for a stock is usually 0.01 i.e. the minimum amount that stock price can move. That can be quoted in US Dollars, UK Pounds, Euros etc. This does not really matter as we place our bets in the currency of the Spread Betting account we chose (either Euro or UK Pound). So say we have a Euro denominated platform and we decide to bet €1 per point on the price of Apple shares. We opened our trade when Apple was quoted at $110.50. We were correct in our analysis and Apple shares rise to $110.90. This means Apple shares rose $0.40 or 40 points. We close our trade. As we bet €1 per point, we make a profit of €40 on this trade.
There is, of course, the risk that Apple shares will fall in value when we had our buy bet open which will result in a loss. In the same example, if Apple shares had fallen to $110.30, and we closed our trade at that point, we would incur a loss of €20.
The key difference of Spread Betting is therefore that instead of buying an amount of shares (e.g. 100 Apple shares) we are betting a monetary amount (€1 in our example) per point move (0.01 in the case of Apple shares).
Trading With Leverage
Leverage, or margin trading, is a useful tool for traders. It allows them to open trading positions which are larger than what they would otherwise be able to with just their balance alone. When trading currencies, for example, traders can access leverage of 400:1; i.e. they need to use only £1 for every £400 worth on the position. Its margin equivalent comes to 0.25% of the position’s value. There are a few advantages to leverage trading, and it is a commonly used trading feature on many instruments. The leverage ratio may change depending on the instrument traded; for example many shares only have leverage of 20:1 or 5% margin. Leverage is therefore a powerful tool for enhancing traders’ profits. However, it works both ways and leverage can magnify traders’ losses. Therefore, it is important to manage your risks when trading and utilise your leverage in the correct manner.
Is Spread Betting for Me?
Spread betting offers a full range of financial instruments to trade in a simple betting per point/pip model on the easy to navigate Meta Trader 4 trading platform. The reason spread betting is so popular in the UK and Ireland is because profits are completely free from Capital Gains Tax & Stamp Duty. Along with the tight spreads available, spread betting is therefore an extremely cost-effective way of trading the financial markets. This is also true when compared to traditional FX/CFD trading or even investing and buying stocks or other financial products.
If you are a resident in the UK or Ireland, open your spread betting account today and start profiting from the most cost effective way of trading the markets. You may also try it out by open a risk-free demo account.
Know which way the market will go? Start spread betting today!