A Quick Introduction To Financial Spread Betting
For many, financial spread betting typifies casino capitalism
, the City of London and all the woes of the present world economy. At the end of the day, It's high-risk, high-reward and remarkably tax-efficient way of gambling. Ever since Stewart Wheeler, the founder of IG Index, hit upon the idea of trading on the price of gold and not the actual commodity itself over 30 years ago, spread betting has offered access to markets previously only accessible to the institutions. Now, via shares, indices, commodities and currencies, the spread betting market is still one of the most attractive, relatively easy to understand and cheapest option for anyone who fancies the idea of playing the markets for profit.
Although you may 'trade' instead of simply laying a bet and once the bet is live you 'hold a position', the reality of spread betting is based on the same principles as ordinary gambling, or many other investment techniques for that matter. Money (your money) is put at risk in the expectation or hope of a certain outcome, resulting in a return on that investment.
One of the attractions of financial spread betting is its tax-free status. Your transaction is not a trade, it's a bet. Therefore your profits are free from UK capital gains tax and income tax and because you are not physically buying a share when you trade, you are also free from stamp duty.
However, the advantages go further than that. It's a marginal activity, meaning that the bets themselves don't have to be huge sums to potentially make a lot of money. For example, if you see a prediction of share price movement (the spread) for a firm of say 351p to 352p, but you think the share will end higher you could buy at GBP100 per penny movement at 352p. If the firm ends up at 360p (8 points higher than the firm's buy price) you win GBP800. However, if it ended the day down two points from the buy price at 350p, you would have to pay GBP200. But, to create the same exposure and potential return by simply buying shares in that firm, you'd have to part with about GBP35,200!
The upside of relatively small sums for a large exposure can also lead to the downside of similarly huge losses. With some spread-betting companies requiring deposits from as little as 3 percent of the equivalent direct investment value, it only needs a slight movement in the share price in the wrong direction to leave you (the punter) owing the bookie (spread betting firm) substantial amounts of money. You can instigate 'stop loss' triggers whereby a bet is automatically closed if a share price or other index plummets beyond a certain level, effectively limiting any loss. However, it's still a loss and you still have to pay. Spread betting means you are risking your money every time you trade and therefore you must get it right every time. If you fail just once then you could lose everything. So the golden rule is the same as that for gambling: never bet more than you can afford to lose.
With those caveats in mind, spread betting does have many advantages and in terms of ease of use, access, relative costs and adaptability, it provides one of the simpler and potentially very rewarding starting points for any budding trader.
by: Tom Hawkins
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