What is Financial Spread Betting?

Spread-betting involves online gambling on the direction of shares, commodities or stock market indices, and is becoming hugely popular with ordinary investors. Read on to find out more about the benefits – and the potential risks.

Spread betting has been around for years as an alternative to direct equity investments, although in the past it’s mainly been available to City traders. But in the last few years it’s enjoyed a boom in publicity and popularity with private investors – it’s estimated that there are already around 150 000 spread betters in the UK, and the numbers are growing by 25% a year. Find out more about Financial Spread Betting

“Financial spread betting is a highly adaptable trading tool enabling investors to gain access to a wide range of markets in an easy and cost-effective manner,” says Michael Foulkes, TD Waterhouse UK’s Chief Executive. “Customers are able to gain exposure to indices, equities, currencies and commodities on both UK and international markets.”

It works like this: the spread-betting company quotes a buying and selling price for the FTSE 100 index – and the difference between these prices is the spread. If you think that the index will rise, you might “buy” at say £10 a point (that’s £10 per penny the shares moves). If you allow your bet to run until the market’s close and the FTSE does rise, your profit will be the difference between the closing price and the opening price you were quoted. If you wanted to bet that the market will fall, you would “sell”, hoping that it would drop below the quoted level. You usually get the opportunity to practice first using an online simulator.

You can choose to leave your bet open for a day or longer – and there are some amazing success stories. One woman, for example, took out two bets on Google shares at just £1 and £2 a point, and left it open for two months. She made a £27,000 profit.

Spread betting appeals to a wide variety of people who want to take advantage of its versatility: it can be used to increase the risk and potential rewards of an investment through leverage, or to reduce risk by hedging an existing share portfolio. For example, if an investor holds shares that he expects to decrease in value in the short-term, but would like to retain in the longer term, he could “sell” the value of the shares using a spread bet. If the share price did fall, as expected, the investor would make a profit on his spread bet to offset the decrease in value of the shares.

Financial Spread Betting - The Pros:

• As spread-betting is gambling, all profits are free of Capital Gains Tax, plus are exempt from Stamp Duty, which is currently charged at 0.5% of UK equity purchases.

• Spread betting is flexible – you can choose to go short or long term.

• There is the chance to make a greater investment return.

• Spread bets are a margined trading product, which means investors only need to deposit a small percentage of the full value of their trade, freeing up their money for use elsewhere. On most shares, for example, the minimum deposit is between five and 10 per cent of the underlying value of the shares which means that customers can take a bet in an equity with as little as 1/20th of the money required to buy the underlying shares from a traditional stockbroker.

Financial Spread Betting - The Cons:

• Spread betting is gambling, not investing – and the odds will always be set against you by the spread betting company.

• Spread bets are high risk. You can make big bucks if you guess right, but if your bet goes wrong, it can go horribly wrong – in fact, you can lose far more than the amount you bet in the first place. You can prevent some of this risk by setting up a “stop-loss” limit, which will close your trade at a set level if the price moves against you.

• Because you only need to deposit around 5% of the total bet, you may be tempted to bet more than you can afford, hoping that you will win and won’t ever need to cough up the cash – but if it backfires, you could find yourself in debt.

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