A: There are two types of spread bets: bets that close at the end of a trading session (i.e. finish when the markets close) or bets that end at the finish of the quarterly cycle: the end of March, June, September or December. For instance you can place a spread bet on whether NEXT (Lon: NXT) will retrace in a trading day or on where it will finish at the end of June. This doesn't mean that if you make a quarterly bet you have to leave the spread bet open till the expiry date, in fact you can close the position at any time until the expiry of the bet. You could also rollover daily or quarterly bets into the next trading day or quarterly cycle - if you opt not to roll or close your bet it will automatically close on the expiry date.
A: Spread betting is straight-up betting as the name suggests. The prices are parallel prices not market prices, so you never actually trade the underlying asset classes themselves. Thus, strictly speaking it is subject to betting regulations - not investment regulations even though it still falls under the auspices of the UK Financial Services Authority.
All spread bets legally have to have an expiry date when the profit/loss will be realised otherwise it wouldn't count as a bet. Likewise spread betting providers don't charge actual commissions but make their money on the spread for the same reason. However, bets can be offered as far away as a future price on the FTSE 100 in a year's time (so you have a year before your position closes and you could always roll the position over to the next quarterly!). Similarly you could also roll a daily bet over onto another day.
The upside of this is that there are no taxes or stamp duty. Depending on who you use there are no transaction charges either. Transaction costs are built into the price spreads. It is worth noting that the credit crunch has fuelled a surge in spread betting in Britain, as people speculate tax free on the stock markets rather than sink their capital into turbulent stocks.
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A: Yes you can! In fact there is a misconception amongst some traders that spreadbetting is only suitable for day traders who jump in and out of the markets multiple times in a day. However, this is not really the case. Today's very low interest rates have made it possible to hold out positions for much longer periods. If many weeks and months pass, though, with things not doing what you expected, then your original rationale for the trade will start to look a bit more shaky, so you will tend to close it out, and try something different.
Let's take the case of a £20,000 Vodafone position held over a year. A £20,000 Vodafone (long) spread bet position could maybe cost you up to £500 in financing charges over a twelve month period.
However, you have to take into consideration that when you buy £20,000 of Vodafone shares via a spread bet you will be immediately saving £100 in stamp duty (at 0.5%) compared to buying the actual stock. Also, whereas when buying £20,000 of Vodafone shares would require you to tie up that amount in the position, a long-term spread bet would only require you to deposit a fraction of that (say £3,000).
By purchasing a spread bet, you could keep the remaining £17,000 in a savings account earning interest. If one were to assume a savings rate of 3 per cent, you could earn £510 in interest before tax to help offset your financing charges.
And with a spread bet you don't have to pay any tax on profits if you're right. This is, of course, a great saving. Suppose Vodafone goes up as much as you expect, leaving a gross profit of around £3000. Whereas you might have to pay roughly £540 in capital gains tax on the shares, you'd pay nothing on the same position via a spread bet. Longer term investing with spread betting is discussed further here.
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