Differences between Spread Betting and Share Trading

Good Differences - Spread Betting Versus Trading

Salt and Pepper


Spreadbets are leveraged, meaning that trading accounts' buying power is amplified to permit the trader to take more positions or deal in larger position sizes in the quest for bigger returns. So with £1k margin, if you use, say, 10:1 gearing, you can gain the equivalent to £10k's worth of shares. Of course, then it only takes the shares to fall 10% to wipe out your margin. It's the same principle as property investment (with a mortgage). With traditional share dealing more money is required to cover the same amount you could with a spread bet. This is an important advantage of this trading product and is possible because with a spreadbet you are simply profiting from the movement of the underlying asset and not physically buying shares. Of course with leverage comes risk - ultimately it is up to you to use good judgement and use leverage wisely.


Many stocks aren't very liquid. With spread betting opening a trade is however very easy and since most spread betting platforms are based on the market-maker model you can close out positions quickly.

No Taxes

Right now, there are no taxes on spread betting profits in the UK. No stamp duty, and no capital gains tax if you are fortunate enough to have a gain. In contrast, profits from trading shares incur income/capital gains tax and stamp duty. This situation could change and the tax free benefit may not always apply. The authorities in a number of jurisdictions are studying spread betting with a view to bringing it under the auspices of the same agencies that regulate mainstream investments. When this happens it is reasonable to expect that there will be some political pressure to impose taxes as well. It is also worth noting that the tax free benefit also means that losses cannot be offset against future gains.

There also appears to be a general consensus that spread betting is 'dirty', 'low rent', not 'nice and clean' like direct market access...that's boll0x...not paying the revenue a penny of your winnings far outweighs the spread fees involved and the image issues. Making a grand in a week and keeping it, (despite the spread trading company making perhaps 200 quid out of your efforts) is OK by me...

Going Short is the same as Going Long

Short selling is when a trader takes the view that the market, or a particular stock, is in a downward trend, or the price is about to collapse for some reason. Shorting allows traders to take advantage of falling prices by selling a stock that they don't actually own and banking a profit by buying it back at a lower price. There are a number of mechanisms to allow this belief to be exploited. The most common are short selling of the share, and the purchase of PUT options - and of course there is also the spread betting medium. Of course, if you already owned the share it is open to you to simply sell it, or if you wanted to retain the stock you could sell covered CALL options.

Where short selling or the purchase of PUT options is contemplated, the trader will immediately come up against a number of obstacles. In order to sell short, the broker must be able to borrow the required number of shares to sell, until such time as the trader decides to close his or her short position and buy them back. This could prove to be difficult. In addition, certain shares will not be eligible for short selling at all. These will be securities that are already at a low price to begin with. In Europe, in particular, many brokers will not allow anyone to sell short.

As far as options are concerned, things are not always equal with regard to PUTs and CALLs. Very often, the most liquid market exists on the CALL side and, while you will not normally have great difficulty in purchasing your PUTs, there could be a problem in finding a market when you want to sell them. You could, of course, keep them to maturity, but this increases the risk.

In spread betting, all other things being equal, there is no difference between playing the long side and the short side, except that in one case you want the price to go up, while in the other you want it to go down A spread betting provider will normally have no problem permitting a trader to short a market or stock to take advantage of a falling price. This is clearly an advantage as a stock typically falls much faster than it rises and being able to take advantage of such opportunities allows for greater trading flexibility.

Most like to allude spread betting as a tax efficient way to hold long positions in shares. However, the real advantages of spread betting is that you can take small positions, top slice, use partial (non-guaranteed) stops...etc for no extra dealing fees...

Bad Differences - Spread Betting Versus Trading

Transaction Charges

It is often claimed that one of the advantages of spread betting is that there are no transaction charges like there would be if you were to deal with a normal stockbroker. This is true, but in some cases you are better off financially to pay the broker's charges, this is especially so for positions held over the long term. Remember that spread betting effectively disguises the charge within the spread.

Dated Contracts

When you buy shares in a company, you are free to keep holding them for as long as you want. Spread bets, being wagers that a particular event will happen at a specific point in the future have to carry an expiry date. You can place bets (either buy or sell) based on what you think the share price will be at certain future dates. Normally these are rolling daily bets (for short-term traders only), or 3, 6, 9 or 12 months ahead. The further ahead the contract, the larger the spread you have to beat meaning that the price will hve to move more to breakeven or make a gain. This is fair enough, as it is the way the spreadbetting firm charges interest for the leveraging involved, and normally the spread is not too unreasonable (only a couple of %). You are free to close your bets at any time whether you're 'winning' or 'losing', either cashing in your profits or cutting your losses. You can also rollover the bet to the next time period if you want to keep it running, rather than closing the bet and opening a new one.

Limited Securities where Spread Betting can be used

Financial spread betting companies are more interested in taking bets on the largest listed companies, main currency pairs and and other indexes than in covering the full market. This limits the scope for their customers. One of the advantages of trading individual company stocks is that the trader can make quite informed judgments about the potential of the company's share price performance based on its assets, cash and cash flow position, the markets it sells into and so on. Where indexes are converned, the only meaningful criteria are broad based economic indicators, such as interest rates and consumer sentiment. The individual investor's potential for standing out from the crowd, so important for success in investing, is largely not present. On the other hand stock market exchanges have fixed hours and traders will only be able to deal whilst the exchange is open. This restriction may not always apply to spread betting providers who may offer trading on certain index markets and commodities even when the underlying exchanges are closed.

No Company Rights and No Say in how the Company is Run

You have no rights to the underlying company stocks or benefits that it might offer. When purchasing shares through a traditional stock broker you in effect own a percentile of the company and will also have a say in how the company is run. With spread betting you are simply taking a position and profiting (or suffering a loss) from the difference in the stock price of the company between the time you open and the time you close the position. Although this also means that with traditional share dealing you also have to pay capital gains tax on any profits if you sell the stocks and you lose money if the stocks go down in value.

The Spread Betting Companies make the Rules

If you buy shares with the purpose of holding them for a relatively short period of time and then selling them, you will be engaging in the activity known as trading. The trader is set apart from the type of person who buys shares with the intention of holding them for a long period, perhaps forever, with the expectation of benefiting over a long period by having an income from dividends with a large capital gain in many years time.

As a trader, you will only have to worry about what the market does. There are very clear definitions of what you can expect to get when you decide to open or close your position. True, you will have a spread to contend with (the price at which you can buy from the market maker will not be the same at a given instant in time as the price at which he will buy from you) but this will be, to a large extent, transparent to the normal trader in a market with normal liquidity.

You will, in effect, be pitted against, and find yourself interacting with, the great body of other traders who are interested in the same securities as yourself. The market will dictate the outcome, for better or worse.

When you start dealing in equity or index options, the position changes. The spread then becomes a significant item, and you will be up against option contract expiry dates, as well as the market as a whole, but at least you are still dealing in a real market, unlike in spread betting.

To Conclude

As can be seen above financial spread betting can prove risky and may seem a daunting prospect even for those with some experience and knowledge of the market.

Some people may think that in addition to being risky, investing in shares is ethically acceptable whereas betting has slightly different market connotations.

However, it might be worth keeping in mind that shares are purchased by those who believe they will make a profit and a share price bet has exactly the same objective.

In practical terms, the only real difference between buying a share and betting on the movement of the share price is that more ready cash is required. Overall, the costs of buying a share are much greater than placing a bet.

The chance of losing more than the initial deposit means that it is vital to learn as much as possible about how spread betting works before placing an initial trade is even considered.

On the other hand, spread trading is also one of the simplest and cheapest ways for you as the private investor to back your belief with hard cash. So for day trading spread betting may be an option worth considering.

Big gains are entirely possible in a short space of time, however, it is wise to be cautious and minimise the risk of big losses occurring.

There are of course other reasons why spread bets appeal to investors. Perhaps the most prominent being that unlike conventional share trading there is no capital gains tax on profits.

In addition to this, there is a lack of stamp duty on transactions as it is viewed as a bet rather than an investment.

However, with the absence of a stop loss any bad decisions made cannot be offset against capital gains on ordinary investments.

But if a bet has been placed on the share and a guaranteed stop-loss limit imposed, you would limit your loss to a predetermined amount. A stop-loss is exactly what it is called - a limit to the amount you might lose. On the other hand, there is no limit to the amount you might win.