When you’re brand-new to trading, one of the first big questions you might ask yourself, particularly when opening a new account with a broker, is “What the heck is spread betting?” You can kind of remember the names of the major stock exchanges, have just about gotten over the shock of the seemingly limitless number of markets you could trade on and can list from memory a good handful of tradeable commodities. You’re making good progress. Everything’s going well until you sign up with a broker and BAM! Right in front of you is a big fork in the road. Do you pick spread betting or CFDs (contracts for difference)? How on earth do you choose?! Is this a life-or-death decision that will determine the fate of your entire trading career?
What is Spread Betting?
Ok, well firstly, you can relax. Though there are some major distinctions and benefits between the two options, the biggest difference between spread betting and CFD trading is how they are treated for the purposes of taxation. Any money you make from spread betting is exempt from Capital Gains Tax (CGT) whilst with CFDs this is not the case (although your losses can be offset against any profits when doing your tax returns). Another crucial factor is that CFDs are global but spread betting is only available to traders in the UK and Ireland, so if you’re reading this from any other location you don’t need to worry. You can put your feet up, the choice has already been made for you.
In a nutshell spread betting is a derivative that allows you to put a trade on whether any given market is going to go up or down, without forcing you to actually buy the underlying asset (stock or commodity). If your speculation is correct and the market rises or falls as predicted then your profits will grow (and keep growing) the further the chart moves up or down. The bad news is that this also works in reverse (though you make sure to put Stop Losses in place to limit your losses and follow a strategy to limit the chances of going wrong).
The fact that you can personally profit from markets independent of whether a company is proving successful or the wider economy is booming gives you a much wider range of trading opportunities than a traditional buy-and-hold investment or putting your money in the hands of fund manager.
With a spread betting account there are three crucial concepts that you should really become familiar with…
GET TO KNOW: The Spread
Is it any surprise the eponymous spread tops this list? This is how the account got its name and is effectively the charge you pay to open your trading position. The spread is simply the gap between the offer and the bid price. Bid price refers to the highest price that traders are willing to pay for a security whilst the Ask price refers to the lowest price that the holders of that security are willing to sell it for. You are always going to buy at a slightly higher rate than the market price and sell slightly underneath it.
Let’s look at an example. Say you wanted to buy the EURUSD at the current price of 118.88 to buy and 118.87 to sell. The spread on this market is 1 pip. If the price now moves to 119.20 to sell and 119.21 to buy you would have profited by (118.88 – 119.20 = 32 pips x position size (£5) = profit) £175.
GET TO KNOW: The Bet Size
The other key component of spread betting is, unsurprisingly, the bet. The size of this is the total amount that you will put on the line for each unit of movement in the price of the stock, index or commodity. The bet size will therefore determine the amount of money you gain or lose.
Although you’re able to decide the size of your bet, it must also meet the minimum requirement set by your broker for that given market.
GET TO KNOW: The Duration Of Your Bet
In trading as in life, time waits for no one. The duration of your bet is something that you will need to pay very close attention to. All spread bets expire according to a fixed timescale which can range mere days to a good chunk of the year. However, you can close your position at any time before the preset expiry so long as the spread bet is open for trading.
Why Choose Spread Betting?
The advantages of spread betting has made it a particularly popular way of trading for British and Irish retail investors. First and foremost is the Tax-free profits. If you’re a PAYE worker you don’t need to start messing around with the bureaucracy of HMRC. If you’re self-employed, you’ll be well-aware how complicated the taxman’s forms are without having to chuck your trading history into the equation. With spread betting, any money you make can go straight into your bank account and spent or saved as you like; nothing owed and 0% hassle from the Government.
Spread betting allows you extract profit from markets, stocks and commodities regardless of whether the price is going up. This flies in the face of a traditional investment where you’d lock up your money for as long as possible and hope the stock you’re holding rises in value. With spread betting you’re putting your money away for a fixed period of time and getting it out to be used elsewhere (along with a little bit of profit if you’re doing things correctly). If you believe the price will rise you would open a ‘long’ position (buying) whereas if you’re seeing signs of an imminent correction you would go ‘short’ (selling) on the asset. As you can imagine this flexibility is a huge advantage and means that even terrible things; things that have harmed your personal circumstances or your business, such as the effects of the coronavirus, can actually yield profits when it comes to your trading.
The huge choice of assets to trade with is also another huge draw to spread betting; a much wider selection than traditional forms of investing. Take your pick from anything from the forex markets; choose any index, share, commodity, bond or ETF. Due to their extreme volatility, the FCA has (at time of writing) recently taken the decision to exclude cryptocurrency derivatives from UK retail traders but otherwise, the options are practically limitless. Add the facts that spread betting accounts require only a small initial deposit, allow you to trade practically around the clock (please don’t discount the benefits of a good night sleep) and don’t require any commission to be paid (as the costs are covered entirely by the spread itself) then you can easily see why spread betting is such a tempting method of trading.
The Importance Of A Trading Education
As UK brokers are mandated to remind you of, a majority of retail investor accounts lose money when trading, whether that be in spread bets or CFDs. Anyone can place a trade but the success rate is determined by the knowledge, software and tools that the trader has available to them.
Whether this is your first time taking on the forces of the market or you’ve had limited success and want to improve that potential, we have a course that’s right for you. If trading sounds interesting to you, then please remember to check out Learn To Trade Online; it’s a FREE one-day training course that we regularly hold and covers day trading, swing trading and many of the basic concepts.
Are you ready to start your trading education? Good news, registration is now open for our Pro-Trader Programme! Join now and learn how to generate a reliable second income that fits around your professional schedule or even turn trading into your full-time job. Click here for more information.
At Trading College we believe in a systematic and discretionary approach. We cater to both kinds of traders with our strategies that can be mixed to create great trading results. In this article, we will have a look at the pros and cons of both trading styles and...
What is Risk vs Reward in Financial Trading? Risk to reward is the relationship between the amount you are willing to risk on a trade and the amount of profit you hope to make. It is a gauge of the potential profit (reward) of a trade compared to the potential loss...
WHAT IS SWING TRADING? Swing trading is one of the most popular forms of actively trading the markets; particularly amongst traders using technical analysis. Unlike the intraday trades placed when you Day Trade, Swing Trading is a trading style that tries to make...