Why Spread Bet?

Why spread bet rather than buying equities or indices and is it more risky?

If you are looking to invest money and make a decent return i.e. better return than just sticking it into a high interest bank account, equities are the asset of choice for most people. There are various products available that can give you exposure to the stock market, however, there are number of advantages spread betting has over more conventional form of stock market investments. The most influential or key reasons for choosing spread betting over buying shares are:

• Leveraged investing
• No taxes*
• Breadth of markets available

 *May be subject to change in the future, tax law may differ in jurisdictions other than the UK and dependent on individual circumstances.

 

Spread betting is leveraged investing

Spread betting is geared. What does this mean? Essentially this means for every £1 you place on a spreadbet, the Spreadbetting firm is lending you an additional amount on top of that. This additional amount will depend on the type of product you’re investing in, and the spread betting firm you use.  You can compare the different spread betting firms here.

Say you have £500 and want to take a position on an Apple share because you buy so many of their products you think its share price will go up.

	Option A – Buy shares	Option B – Spread bet
Share price/Spread price	£50	£50
Spend £500	This gets you 10 shares	You are able to trade Apple at £1 per penny movement.
Share price increases by 10% to £55	The value of your investment goes up by £50	The value of your investment goes up by £50
Share price goes down to 5% to £47.5	The value of your investment goes down by £25	The value of your investment goes down by £250
Maximum risk (assuming no stops)	£500	£5,000 (because you’ve effectively borrowed 90% of your investment. However this is easily managed by placing guaranteed stop orders with your spreadbetting firm.

Note this is an over simplified example to illustrate leverage. In reality there are plenty of other things to consider, which will be explained in more detail on this site.

As an example of the power of leveraged investing, people often neglect the fact that leverage is major part of reason that real estate investments have made such a good return in the past 50 years, because people were borrowing 90% of the cost of the house from the bank.

Think of it like this, if you invested £10,000 and it made a 10% return in a year, whilst that’s good in investment terms, it’s only £1000.

However, if you use that £10,000 to get leverage so that the investment is actually worth £100k (as is the case with spread betting), then if the £100k makes a 10% return in the year, then you’ve made £10k, which is a 100% return! Even if you had to pay 5% financing costs (e.g. mortgage interest), then you still make £5k in one year, which is a 50% return on your initial investment.

You might think it sounds too good to be true, but it isn’t. It’s just that the downside is that it can go the other way if you don't manage your risk properly. Read Key things to know about Spread betting to find out more.

 

No Taxes to pay on Spread betting*

Because you are not physically buying shares, in the UK there is no stamp duty to pay, no capital gains tax on earnings, no income tax on dividends.

In the UK, if you invest into an individual stock in the stock market (or elsewhere), you are subject to c40% capital gains tax on increases in value of the stock over a certain amount, AND to income tax on any dividends received.

However, any gains and/or income received as a result of spreadbetting are currently NOT subject to any tax. So if you do hit big with a stock, you don’t have to worry about giving anything back to the taxman when you spread bet. This becomes more relevant as your investment stakes become higher, as there is an annual capital gains tax allowance you can use to offset any initial gains on an individual stock investment.

*May be subject to change in the future, tax law may differ in jurisdictions other than the UK and dependent on individual circumstances.

 

Spread betting provides access to a breadth of markets

Spread betting instantly offers you access to a much wider variety of markets than conventional investing as soon as you have set up your account. For example: Short selling, Forex, International stock indices, Shares, Commodities, Binary bets, Options, Custom bets, interest rates, sectors and house prices. Without spread betting, it is very complicated for an individual investor to get exposure to this breadth of markets.