A: There are several differences. 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.
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.
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While financial spread betting is not for everyone there are a number of useful benefits in trading this way:
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.
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. 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.
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 |
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Buy 10,000 shares |
@ 140p |
Buy £100 per point |
@ 140.1p |
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Cash outlay |
(£14,000) |
Cash outlay |
(£1,401)* |
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Sell 10,000 shares |
@ 200p |
Sell £100 per point |
@ 199.9p |
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Gross profit |
£6,000 |
Gross profit |
£5,980 |
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Return on Capital Employed |
34% |
Return on Capital Employed |
420% |
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ROCE working: 4750 / (14000 x 100%) |
ROCE working: 5890 / (1401 x 100%) |
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*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. |
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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.
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