Spread Betting versus Share Dealing

Q: What is the difference between normal trading and spread betting?


A: There are several differences and there are some unique advantages to spread betting which are not present in traditional share trading. Spread betting is a leveraged product, where you are speculating on the price movement of the underlying stock. Unlike share dealing you do not physically own the shares. With spreadbetting you receive tax benefits. You pay no CGT (capital gains tax) whilst on standard trading you do. Also, the trading commission is incorporated into the 'spread' - hence spread betting, as opposed to charge per lot, or trade with conventional trading.

'When you buy shares you incur all kinds of costs. There's the broking fee, which could be say £10 (or more likely £9.99) to buy, and the same to sell. Then there's 0.5% stamp duty paid to the government. Next you'll suffer CGT at up to 28% on any profit you make between buying and selling.' - MoneyWeek

There is no direct market access, the spread betting company is the 'exchange' you are trading with. The spread betting company acts as a market maker and quotes a spread around the live, underlying market price and you can spread bet on whether this market value will rise or fall. The spread is the only cost of entering a trade in spread betting. If you go through the more conventional shares dealing route you will typically pay about £12 per trade plus the 0.50% stamp duty levied on share purchases. When betting keep in mind that you own the 'price' of the share and not the actual underlying share. In traditional stock market trading they use a direct feed to the banks - therefore you trade on the underlying market price.

Let's say you believe a certain financial market is going to decline in value. You'd like to enter the market to take advantage of this, but there are two problems in traditional markets:

  1. This market is restricted to 'buy' trades only, so you can only take advantage of a rise in value..
  2. Even if you could get into the market, you don't have enough money to cover the position.

Fortunately, there's a trading method that can help you avoid the 'rules' of other financial markets: spread betting.

While financial spread betting is not for everyone there are a number of useful benefits in trading this way:

  1. The profit that you make is currently free from UK and Irish Capital Gains Tax and Income Tax.
  2. Low transaction charges - the only cost being the spread (the difference between buy and sell prices) and the cost of funding. The cost of financing long-term spread betting positions has also been reduced substantially in the last few years with falling interest rates which means that many spread bettors are now happy to hold positions for up to six to eight months.
  3. You only deposit a small portion of your market exposure - this gives you leverage which has the potential to increase your returns.
  4. You can still make a profit in falling markets - provided that you predicted the markets were going to fall rather than rise.
  5. You can also trade a wide variety of commodities, currencies, indices, interest rates and bonds.

In normal trading you buy a number of shares and view your position as either #shares or total position size (#shares * share price). In spread betting you take a long or short position and place a stake per point of movement, i.e. you only care about how much the price moves (up or down).

In regular trading: if I believe that the Euro will get strength I would buy 100k -> you choose the amount.
In spread bet: I believe that the Euro will gain strength I would buy with stake of $10 -> you choose the size of the point.

With spread betting you don't own the shares or the market you're trading (which is the case with normal trading). Therefore all your doing is allocating a money value to each 1 point move in most markets.

e.g. Do you want to Win/Lose £1 for every 1p move in the share price or do you wish to Win/Lose £10 for every 1p move in the share price? You can change this to any level you wish.

When buying shares from a stock broker you will be asked to pay for them in full. If you asked your broker to buy you £5,000 worth of shares in Marks & Spencer, you will be expected to pay the full £5,000. If you open a £5,000 spread betting position in Marks & Spencer, most providers will ask you to pay initially only £500 or 10% of the value. This means that you control the same size asset with a much smaller amount of money - in this case £5,000 worth of Marks & Spencer for just £500.

Q. With spread betting, say you bet on a market to go up - and it goes down 10 points or something, do you incur extra costs or is it like regular shares?

I was wondering that with financial spread betting say you bet on a market to go up and it goes down ten points or something, do you incur extra costs or is it like regular shares dealing where you simply lose the value of your bet and if so what is the real difference between spread betting and regular investment since they seem to be based on the exact same principle?

A: That's right - the principle is the same; the difference is that with shares you actually have to cough up the full cost of the shares. Let's take an example _:

If you buy 5000 shares at £2.50 your outlay is £12,500 + costs...if it drops in price by £1.00 to £1.50 you will have lost 40% of your initial £12,500 investment + costs (i.e. loss of £5,000).

Spread Betting Trade:

Say the margin requirement for the stock is 5%, your margin requirement to open the trade would amount to £625.

5000 shares = a bet of £50 per point (penny), so if your stock drops by £1.00 you will lose 100 x £50 = £5,000...which represents the same exposure.

However, if you had utilised the same full £5,000 you may have been tempted to bet up to £400 per point to use your full £5,000 as margin...£1.00 drop in price x £400 = £40,000.

...either you would have lost the £12,500 and closed the trade out or you would have had to have added and lost another £27,500.

Q: How does spread betting compare to shares trading?

A: I think spread betting is complementary to share trading in the sense that you can easily be a private investor managing your own portfolio while allocating a certain amount of money to your daily dealing activities. There's the ease of transaction; it's easy to transact business whether it's to the long or the short side with a spread better. You don't have to send in share certificates, there's no physical ownership, it's just right there and then. You can walk down the street and decide: 'I fancy shorting Vodafone'. Another benefit is you can watch the 9 o'clock news, and you can phone up your spread better and say: 'You know what, I would like to have an out-of-hours quote on GlaxoSmithKline'. You can't phone up Barclays at 8 o'clock, they'll be closed. So it's a 24-hour service.

One of the main differences between spread betting and traditional shares trading is the way they are dealt - the so called 'pounds per point' concept. With spread betting you are still quoted two prices, and you still buy at the higher price and sell at the lower price. However, instead of buying a number of shares you simply trade a certain amount of 'pounds per point' movement in the price.

Additionally, buying shares involves paying the full purchase price, but using a spread bet it is possible to replicate the same position with less cash. Blue chip stocks typically require a margin requirement of just 10% (and indices even less) of the effective market exposure which means that you can use this to make a far heftier profit on the same stock by opening a spread bet. A 10% margin means you could use your £1,000 to buy a contract to buy or sell a further 90% of a larger holding. As you would have only paid 10% margin, your investment would have been geared ten times, or a 10:1 ratio, meaning your profit or loss would be magnified by ten times relative to your initial outlay.

For instance a 5% rise in BP's share price would be equivalent to a 50% return on the margin deposit (of course the reverse is also true which is why you must be careful when using margin). Also, with spread betting you don't pay stamp duty on positions and gains are tax-free. The other main advantages is that with spread betting you can speculate on down movements of markets and you have access to a much wider range of instruments (indices, options, commodities..etc). Check some more differences between spread betting versus share trading here.

Where spread betting definitely gets the edge is when dealing with smaller quantities of shares, say buying 300 or 500 tranches. Dealing costs and stamp duty are going to hurt when trading shares in such small sizes. Depending on your broker you will have minimum of £10 dealing cost to buy, then at least £10 to sell as well - with say £500 worth of shares you need a 5% or so rise just to get your transaction fees back, and that ignores the spread, stamp duty...etc. These fixed dealing costs become relatively insignificant with larger transactions, but will bleed you dry with holdings this small. Spreadbetting is probably the better option for a smaller amounts of shares - you have a wider spread but no fixed transaction costs.

Let's now take an example of an active investor with a capital portfolio of £200,000 who invests in a number of UK stocks throughout the year. He switches his portfolio around about 10 times in a year and usually manages to make a 10% year in, year out. Why might such an investor want to consider trading his portfolio using the spread betting medium?

Let's assume that the investor buys tranches of shares in amounts of £10,000 20 times a year - being charged £15 each time he buys or sells shares using a traditional broker, we can break down the activity as follows:

Share Trading

Spread Betting

Yearly profit:


Yearly profit:


Commission costs:


Commission costs:


UK Stamp Duty


UK Stamp Duty


Tax cost (28% tax)


Tax cost (28% tax)


Net Profit


Net Profit


* It has to be noted that spread betting carries with it a spread and daily financing fees. This spread implies that you will exactly get the same price as if you bought the physical stock.

The table below illustrates how a share investment held for 30 days might compare to if it was done as a spread bet -:

Traditional Stock Broker

Spread Betting Company

Buy 10,000 shares

@ 140p

Buy £100 per point

@ 140.1p

Cash outlay


Cash outlay


Sell 10,000 shares

@ 200p

Sell £100 per point

@ 199.9p

Gross profit
Stamp duty
Commission (buy/sell)
Tax @ 18%
Overnight financing
Net Profit


Gross profit
Stamp duty
Commission (buy/sell)
Overnight financing
Net Profit


Return on Capital Employed


Return on Capital Employed


ROCE working: 4750 / (14000 x 100%)

ROCE working: 5890 / (1401 x 100%)



*This is using the 'Max CGSL' for most shares which is 10% (the 'Min IMR' is 3%). Note: you can lose more than this deposit.

Remember that the risk is still the same for taking on a spread bet or trading the stock through a broker. For instance, if the company you were trading on was to go bust and its share price plummeted to 0p overnight, then you would still be liable to a £14,010 loss with the spread betting company and not just the 10% deposit of £1,401.The other benefit of doing this trade as a spread bet is that you've freed up almost £12,600 of spare capital to use elsewhere or to leave in the bank earning interest (which could go some way to paying for the overnight financing.

To my mind the main advantage of holding actual shares is that if you choose to buy and hold based on a long term perspective (totally ignoring technical analysis - as per positive/negative news) as per Warren Buffett you can watch them go down any amount if you are prepared to wait years for them to rebound. It costs you nothing. You could not do that with a spreadbet as carry costs would be too expensive over such long term timeframes. Another advantage with shares is that some companies are too small for viable spreadbetting.

 ...Continues here - Leverage and Gearing - the Double-Edged Sword

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