Spread Betting vs. Shares
Over the last decade, spread betting has become a popular option for investors and speculators alike, and there are now 150,000 spread betting accounts open in the UK. Spread betting allows you to make potentially quicker gains than on traditional share trading, but it's at a much greater risk. But what are the key differences between spread betting and traditional stocks and shares investing? Here are some of the key differences.
Trading on margin
With stocks and shares, you'll need to have the full amount of capital to make a purchase. So if a share cost £8, you'd need £8,000 to buy 1,000 of them. On a spread bet you can trade on margin (leverage). This means that you wouldn't need the full amount of capital, rather you'd need to put up a deposit. If this deposit was geared 10:1, then you could make a similar trade to the standard stock trade, but with only £800 to 'buy' 1,000 of them. This form of trading on margin means you can stand to make quicker gains with far less money than with share trading. However, it also puts you at a greater risk should the markets turn against you, and it's possible to lose more than your initial deposit.
Tax free
Because you're not technically buying a security through a spread bet, rather you're merely speculating on the direction it will go, spread bets are free from capital gains tax and stamp duty.
You can go short
With stock trading, taking a short position can be technically very difficult. Furthermore, many brokerages refuse to take the position and short selling can have limitations placed on it by Governments. However, on a spread bet, you can simply choose to 'sell' and therefore speculate that the index or security will decrease in value, similar to short selling, but technically much simpler
Hidden charges?
Spread betting providers may boast that there's no brokering fees connected to their product, but in truth there are, through what's called the 'bid offer spread'. This is effectively a hidden charge the spread betting company will profit from; sometimes you'd be better off paying the brokering fees associated with standard trading.
No dividends
By buying shares, you are effectively buying a portion of the company and so you will earn money through dividends on profits. On spread bets, you are merely taking a position on which way a stock will go, and therefore you don't technically own anything. Therefore you won't receive any dividend payments
Make sure you understand the basic principles of spread betting before you risk any money. Reputable spread betting companies typically offer plenty of advice and training when you sign up, Tradefair offer a complementary ‘Little Black Book’ of tips and advice to all new spread betting signups for instance. Such advice really is worth paying attention to.
