Spread Trading: Advantages and Disadvantages

Financial Spread trading (also known as financial spread betting) allows you to speculate on the outcome of almost any financial market, over a set period of time.

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Spread Trading Advantages

There are various advantages to spread trading over traditional share and futures dealing -:

Financial spread trading offers leverage similar to the futures market but with the added advantage of offering traders the opportunity to decide exactly the size of the trade without being limited by fixed contract sizes.

Profits are free of capital gains tax (CGT) under current law. This can make a significant difference to overall trading returns in the longer term. The table below illustrates the tale of two traders. Both commence trading with $10,000 in year 1 and achieve a 40% annual return. Trader Taxman pays CGT at a rate of 50% on all profits while Tax Free Trader uses financial spread trading to make tax free profits.

Of course tax laws are liable to change but I feel it is unlikely in the near future. Under current laws a recreational spread trader cannot offset trading losses against gains. Simply because an estimated 90% of spread traders lose, the tax office is unlikely to be willing to grant them tax loss deductibility to catch the successful ones.

The ability to choose your contract size. Traditional trading requires minimum dealing commissions or contract sizes. Financial spread trading allows you to determine the size of the stake you would like to trade. For example if you trade the London FTSE 100 index the minimum futures contract size is approximately £10 per point. With one financial spread betting company you could trade the same index as low as a few cents per point.

Spread trades can be made partially on credit. Subject to your experience and financial status, many financial bookmakers will offer you a credit account which can completely eliminate the need to deposit any trading capital. I do not recommend this to beginning traders.

You can close the bet at any time when your spread trading company is open. Some financial bookmakers offer 24 hour trading facilities. The amount you make or lose will then be determined by the current spread quoted, which may be different to when you opened the bet.

Small clients are welcome. A typical sharebroker or futures broker is not interested in dealing with small accounts. Indeed, most futures brokers will only deal with a client after they have deposited in excess of £5000 to £10,000 in a broker trust account. Many financial spread trading welcome clients with accounts as small as £50.

Profits can be theoretically limitless and are not set in advance. With spread trading you might bet on the Dow Jones index going higher than 8510, but the higher it goes the more you make with no theoretical upper limit.

Most financial spread trading companies will allow you to set a stop-loss to limit your potential losses. Without this, your potential losses may exceed your expectations. Stop loss positions can also be guaranteed which is a unique advantage of financial spread trading. Stop losses will be explained in detail later but they offer an ideal way to ensure you do not lose more than you are prepared to whilst you are learning to trade.

You can go ‘short’ on all available markets, which means you can profit if the price of a market falls. To do this with a normal stock broker can be difficult to arrange and you are usually limited to just a few days, whereas with spread trading you can short stocks or indices for far longer.

No stamp duty or commission is payable on spread trades. All costs are incorporated into the spread.

Trade multiple markets on one account. Financial spread betting companies offer a one stop facility to trade a diverse range of financial products. These include currencies, options, interest rates, commodities, stocks and more. In fact, it is now possible to trade a huge array of global instruments, 24 hours a day, using your financial spread betting account.

Spread Trading Disadvantages

There are also various disadvantages to spread betting that you should be aware of:

Losses could be higher than with traditional share trading however it bears a similar risk profile to futures trading.

Holding Spread bets for long periods of time can be more expensive than traditional sources of financial leverage.

If you make a loss you cannot offset this against capital gains tax you owe for other investments.

Financial spread betting companies are able to change the spreads, margins and markets available at very short notice. This can limit profits or create larger losses than would otherwise have been the case. Due to the competitive nature of the financial spread trading industry, most spread trading companies provide a high level of service.

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