Pros and Cons of using Spread Betting


Q: What are the Pros and Cons of using spread betting to trade?

A: As with any other trading instrument you have advantages and disadvantages -:

Advantages of Spread Betting

  1. Tax free for UK residents.
  2. Simple price structure, no currency risk.
  3. You can trade the US indicies in sterling giving you a defined return, even if the US$ weakens.
  4. Leveraged. You can keep your capital tied up in other investments, without need to liquidate unless you suffer loss.
Disadvantages of Spread Betting
  1. No dividend payments.
  2. Simple price structure, no currency risk.
  3. Long positions charge a daily financing cost, working out at around 6%-9% per annum.

Spread betting is very 'open' to access and trade, that's its USP. The majority of the firms' profits comes from those who play the markets sporadically and for 'fun'...

 

Q: What is the catch?

A: Well, we know nobody gives you anything for free, likewise there are costs to spread betting. In economic terms spread betting is like going to the bank, borrowing some cash and using it to purchase some shares. In this situation the main cost is loan interest and the secondary cost the broker's fees. Therefore if you were investing by this method your main concern would be the level of loan interest (i.e. financing) and secondary concern the broker's commission (i.e. the bid-offer spread we compare the bid-offer spread of the different providers here).

The interest and commission in spread bets comes from the quoted spread and also the higher price paid for far-dated bets. The effective interest rate on spreadbets comes out something like 6%-9% per year (possibly even more) but it is quite difficult to get accurate figures. I've discussed the relative merits (and cons) of spread betting in more detail here

Spread betting is an amazing way of building a portfolio as you only need to put down a small percentage of the full contract value to fund your overall position. This strength is itself a potential weakness if not managed properly as investors can quickly find themselves in a deep hole if they don't know what they're doing.

 ...Continues here - Trading from the EU or USA



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