Why Spread Trade?

As we have already said, spread trading has really taken off in the UK in recent years and is certainly my preferred method of trading the markets.

Although it has been available for a while to those in the know, it is the Internet and the ability to trade with live prices on-line that has been the catalyst for it’s recent explosion in popularity. The Internet also enables non-UK residents to trade with UK spread trading companies, but check your local laws and tax regulations. For example, spread trading is currently not available to USA residents. UK spread trading companies are not allowed to let USA residents open accounts. Whereas at the time of writing it is becoming very popular in Europe as well as Australia with UK companies opening branches in Australia.

For ease of explanation, I will assume that you are a UK resident. The reason why spread trading is not available in all countries is the very reason why it is so popular in the UK - because it is classed as gambling. But in the UK that gives us a huge tax advantage.

In terms of trading costs, other forms of trading such as buying and selling shares, can mean you incur costs which include things like -:

The market spread (difference between the buying and selling price)
Stamp duty
Broker fees
Income tax on dividends
Capital gains tax on growth profit (share price increase)
…. and a load of paperwork to do for your tax return.

Six Advantages of Spread Betting

There are a number of advantages to spread betting:

Spread betting profits are tax free and free of broker commissions
The major advantage of spread betting is that all profits are free of capital gains tax (CGT), and potentially UK Income tax too. It is difficult enough right now to make money on the markets, without the Inland Revenue taking away a large proportion of the gains. Also, as opposed to normal share trading, there is no 'commission' or 'UK Stamp Duty' (0.5% of the trade value) to pay.

Avoid stamp duty.
- Share trading incurs a 0.5% stamp duty which reduces the effectiveness of day-trading traditional stocks and shares. When buying a spread bet on the same share, you do not which adds to the appeal of spread betting.
Avoid commissions.
- With spread betting there is no commission attached to your trades. Commissions start at around £15 and are payable on both sides of trades. On Capital Spreads, for instance, the entire spread around the underlying market price in FTSE 100 stocks is just 0.1pc (i.e. 0.05% above and below the bid/offer on the London Stock Exchange). On a trade at £50 per point (equivalent to 5000 shares) for a commonly traded stock like Barclays at £3.50 would cost a buyer (if he paid only £15 opening/closing commission) £102.50 in various fees/taxes. With Capital Spreads he would pay just £8.75. To put this into perspective Barclays is traded on about a 0.5p bid/offer spread on the Exchange. Your various costs would add over 2p to the price. This far outweighs any resulting benefits of being able to place your order within the spread on a Direct Market Access platform.
Avoid capital gains tax.
- A 0.5% saving on stamp duty is useful but it is not the kind of money that most retail investors will get out of bed for. The real advantage is that profits are free of capital gains tax in the UK, Ireland and to my knowledge Australia. As the Inland Revenue treats spread betting as a gambling activity, you are not liable to pay capital gains tax on your profits (technically, your 'winnings'). This by itself can save you 18% of potential profits in the UK and probably much more than this in Ireland/Australia.
Avoid tax on dividends.
- Owning a share of stock is the same as owning a piece of a company and this entitles to a dividend; but this is also treated as income and tax is payable on dividends. Spread bets do not pay dividends but the dividend is still factored in the price so if you're a holder of a share that pays a dividend you still stand to benefit from this in the form of a tax-free capital gain, as opposed to taxable income.
You can minimise risk by restricting your losses
With spread betting, you can guarantee your 'stop loss', or the point at which you exit your trade. A conventional share purchase also allows you to set a stop loss, but this is not guaranteed. Therefore, when your share moves a great deal overnight, your broker may not be able to get you out the next morning at the stop-loss price you requested. But spread betting is different. Even if the shares move a great deal, you'll still be taken out of the bet at the guaranteed stop-loss price you asked for - the spread betting company has to swallow the extra cost itself.
Use bear markets to your advantage by going short
'Going short' means reversing the normal process of buying low and selling high. When you go short you first sell high and then buy low at a later date. You do this by borrowing shares from a broker in order to sell them. When you buy the shares, you're actually merely giving back the shares you borrowed. The further a market falls, the lower your buying price and the more profit you'll make.

Going short of a market or share is something that only insiders or the rich were able to do until recently. In a bear market, going short is one of the few ways of making money and spread betting is the easiest and most efficient way of doing this.
Here's an example on how to profit from going short:

You believe that AstraZeneca is overvalued.
- The spread betting company quotes you 1864 - 1872.
- You 'sell' £30 a point at 1864.
The market then slumps, dragging AstraZeneca with it.
- The company is now quoting AstraZeneca at 1844 - 1852.
- You decide to close your position at 1852.
Your profit is (1864-1852) x £30 = £360, free of capital gains tax.

One of the most famous bear spreadbetters in the markets in the last decade has undoubtedly been Simon Cawkwell, aka Evil Knievil
You can start small with spread betting - before hitting the big-time
With spread betting you can choose exactly what the size of the bet is going to be. The range can be as low as 1p 'a point' with financial spreads to hundreds of pounds per point. This means that not only can you trade as small or as large as you like, you can also enter and exit positions in stages.

You can lock in some profits, but keep the bet open
Unlike betting on a horse, with spread betting you are not locked in until the result is known. You can close a bet at any time, even just a few seconds later. And you can also close off part of the bet to lock in some profit, but keep the remainder of the bet open in order to try to make more money.

Use it to hedge your portfolio
Hedging has only been available to large institutions, banks and wealthy individuals until very recently. As an example, if you think the property rise has been unsustainable, you can hedge against the value of house prices going down by spread betting on the property market.

Small investors can now compete on the same level as the large financial players, giving the equity market a new dimension. This aspect of spread betting is still a point that is under-emphasised in the mainstream financial media. In some ways this is hardly surprising, because if you gain knowledge of even the most basic aspects of spread betting you should be able to manage your own financial fate at least as well as the so-called professionals.

For me, the convenience of the available tools and the tax arrangement vastly outweighs any advantage that even a good broker would offer. And (for me personally) it is even better than direct access shares dealing.

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