Financial spread betting is a tax-free way to trade a wide range of financial markets
It is available in the UK and Ireland only. To be able to open a spread betting account, you will need to be a resident of either country. In this section, we’ll help you to understand:
So, how does spread betting work?
Financial spread betting comes with many advantages over trading physical markets, as it offers traders access to a wide range of markets, including stock market indexes, shares, commodities, government bonds, and currencies. Many of these markets can otherwise only be traded by buying futures and options on derivatives exchanges, which is a very expensive process.
When making a spread bet, you are not buying a physical asset, like a share or a barrel of oil, but you are trying to make a profit from the change in the price of that asset or market. The great thing about spread betting is that it lets you take a long position; betting the price will go up, or a short position; betting the price will go down. This means you can potentially make money even when markets are falling.
Spread betting companies also lend you money with which to trade. This is called ‘leverage’, and all spread bets come with a certain level of leverage built into them. Spread betting companies will quote you a ‘margin’ level for each market, for example 5% or 10%. This is the amount of the total trade you need to deposit to open the trade. The rest of the value of the trade, the leverage, is lent to you by the spread betting company. The benefit is that you get to keep the full value of any profits, but you do have to accept the full value of any losses too.
How To Control Your Risk With Spread Betting
When learning how to spread bet, you decide how much you want to risk by staking an amount of money against each ‘point’ the price changes on your chosen market. How many points the price might move in an average trading day will depend on the financial market you are trading. A share price might only move a few points in an average trading day, or it might move over a hundred.
It is usually enough to focus on the last couple of digits in the price but be aware that prices in financial markets can change suddenly. The amount you stake per point will determine your initial deposit and overall how much money you are risking in that trade.
For example, if a company’s share price has a 5% margin, and you deposit £100, while you would initially be risking only £100, the total value of your trade would be £2000. A 2% change in the share price would be a £2 change if you were holding £100 of shares in the stock market, but with this particular example of a spread bet, that 2% change would translate into 2% of £2000, namely £40. It would also be tax free; this could be a profit or a loss, depending on whether you were right or wrong.
One of the best ways to manage your risk when using an online financial trading account is via a stop loss; this is an automatic instruction to close your trade at the price you specify. It means you can limit the amount you lose in advance. If you would like to find out more, you can read about the different types of stop loss that are available to you, here.
Find out if Spread Betting is right for you
Check out our risk profiling tool and find out if spread betting is the right product for you. It takes seconds to complete and will help you to understand which products are suitable for you, based on your appetite for risk.
How To Open A Spread Betting Account
The majority of spread betting brokers offer demo accounts; providing traders with the chance to test out their platform before they commit real money. We strongly suggest that you give your chosen platform a test drive before you begin trading for real. Read our short guide to spread betting demo accounts before you start and we’ll help you to avoid many of the common mistakes novice traders make.
You’ll find that some brokers offer services that are specifically designed with a novice in mind. These brokers provide spread betting accounts that help to reduce some of the risks that you’ll be exposed to with a full spread betting account.
You can find a full list of spread betting brokers, here. Navigate further and we’ll provide you with a detailed review of each broker and, most importantly, our impartial view on their services. You can be assured that we will only include spread betting brokers that are authorised and regulated by the Financial Conduct Authority.
We urge you to check the FCA’s, Financial Services Register, to ensure that your chosen broker is listed before you commit funds.
What next? Download our free spread betting guide
You can download our free spreadbetting guide which sheds light on how spread betting brokers conduct themselves – based on our own experience – so you can make an informed decision about which broker you trade with, should you decide spread betting is right for you.
What Is The Difference Between Spread Betting And Forex Trading?
One of the burning questions many novice traders have is what is the difference between spread betting and forex trading. Once these two concepts are understood by traders, they can figure out which product will be best for them and start trading.
Essentially, the traditional meaning of forex trading is buying or selling a currency against another, with the movement between each currency pair returning a profit or loss based on whether the trade was correct. In the event that the price of the currency pair decreases, by selling that currency pair, the trader can make a profit. Of course, if the currency pair increases, the trader will make a loss. Due to there not being a universal exchange, transactions tend to be made ‘over the counter’. When a deal is agreed upon, the currency exchange is made between the trader and the broker.
If you take part in spread betting, you will notice that one of the biggest differences between spread betting and forex trading is that the underlying currency is never owned. Instead, spread betting on currencies involves a bet on the price movement, anticipating whether the price of the financial instrument will increase or decrease. Depending on the marginal variation of an outcome, the investor will either win or lose money.
As part of understanding the difference between spread betting and forex trading, it’s important to have knowledge of the pros and cons of the two products. For UK based traders, unlike spread betting, where any profits are tax free, forex trading involves paying capital gains tax, in addition to stamp duty. For international traders, such as those based in the US, forex trading is the only way for traders to get access to the currency markets.
Forex trading has been an established industry for a longer period than spread betting. However, since the introduction of ESMA regulations for spread betting brokers, novice traders are no longer able to get access to the high margins that forex accounts can offer. As with all spread betting and forex trading you must ensure you choose a regulated brokerage to ensure your money is protected.