If you deal in shares through either through a traditional or on-line, discount, execution only broker then financial spreadbetting offers an extremely effective alternative.
Typically you would only be able to Buy shares and then Sell what you own, financial spreadbetting makes it possible to Buy in anticipation of a rise in price or Sell in anticipation of a fall in price
Quite a few years ago, my first forays into financial trading were via a regular share dealing account. While I thought I had the right strategy of cutting my losses (quickly via stop orders) and letting my profits run, I found it difficult to make this strategy profitable in practice. The reason was that each time I stopped out, I suffered not only the bid-ask spread plus the stop distance, but also the stamp duty and the round-trip dealing fees of (at the time) up to 2 x £12.95. On very small ‘investments’ of (let’s say) £500 these dealing fees alone could account for more than 5% lost on each failed trade.
Financial spreadbetting carries no dealing charges, attracts no Stamp Duty and all profits are free from Capital Gains Tax*. However, you would not physically own the shares, therefore would have no shareholder rights and would not appear on the Register of shareholders.
If you buy shares to attract Dividends please check with your spreadbetting company how these are treated. Some companies may pay all or part of the Dividend if you have an open position on the ex-dividend date, but remember if you have Sold a position in anticipation of a fall in price then you may be liable for the Dividend – do please check.
Let’s look at the differences between buying shares in the traditional manner and using financial spreadbetting as an alternative.
The first concept to grasp – and this is really important – is that when placing a financial spreadbet you trade in a number of £’s (or $, Euro etc.) per point. Typically, a point on a common stock is 1p in the UK and 1c in the USA of which there are 100 in each £1 or $1. Effectively what this means is instead of buying 100 shares you would bet at £1 per point or £10 per point if you were buying 1000 shares. It really is that simple.
Of course, if you wished to buy 1,000 shares at say £2 per share you would have to pay £2,000 plus Stamp Duty and your brokers dealing charges. Placing the same trade through your spreadbetting company would eliminate the Stamp Duty and dealing charges and you would only need to put a deposit (Margin) of some 20%! (Please refer to the section entitled Margin in this Guide where this concept is fully explained).
Say I’ve got £1,000 to invest or speculate with. If I open an account with XYZ stockbroker and I fancy BP, I can only buy £1,000 worth because that’s what I have in my account, excluding commission, stamp duty and all that stuff. If I open an account with XYZ spread betting company, my £1,000 will go a lot further. Let’s talk about 10 times margin, for example: in theory my £1,000 could buy me a £10,000 spread bet on BP.
Another important concept to realise is that ‘Spreads’ i.e. the difference between what your broker will Buy and Sell shares will be wider with your spreadbetting company. These wider spreads cover the costs of the transaction and are how the spreadbetting companies fund their operations.
Let us look at a worked example:
You wish to Buy 5000 shares in a large UK company whose share price is quoted at £2.00 mid price. You believe the price will rise by 10% and then you intend to Sell the shares and bank your profit.
Buying/Selling Shares through a Execution Only Broker:
| Buying | Selling | |
| Bid Price | £1.995 | £2.195 |
| Offer Price | £2.005 | £2.205 |
| Mid Price | £2.00 | £2.20 |
| No. Of Shares | 5000 | 5000 |
| Transaction Cost | £10,025 | £10,975 |
| Stamp Duty | £50.13 | £0 |
| Dealing Costs | £15 | £15 |
| Total | £10,090.13 | £10,960 |
| Profit £’s | £869.87 | |
| Profit % | 8.6% |
Another point to note here is that you will only be able to trade larger companies – probably limited to the FTSE 350 in the UK and DOW, Nasdaq, S&P 500 in the USA plus comparable markets in other financial centres e.g. Europe and Asia.
Let us look at a worked example:
Opening/Closing Position with Financial Spreadbetting:
| Buying | Selling | |
| Bid Price | £1.99 | £2.19 |
| Offer Price | £2.01 | £2.21 |
| Mid Price | £2.00 | £2.20 |
| £’s per point | 50 | 50 |
| Value of Position | £10,050 | £10,950 |
| Margin Required 20% | £2010 | £2010 |
| Dealing Costs/Stamp Duty | £0 | £0 |
| Profit £’s | £900 | |
| Profit % | 44.8% |
You wish to Buy 5000 shares in a large UK company whose share price is quoted at £2.00 mid price. You believe the price will rise by 10% and then you intend to Sell the shares and bank your profit.
As you can see from this example that whilst the ‘spreads’ are wider using a financial spreadbet, the savings made on Stamp Duty and Dealing costs means that the amount of profit made is £30.13 greater. Moreover, this is achieved without tying up some £10,000 in capital, the use of a deposit (Margin) means that the % returns are far greater. This is what we know as leverage i.e. you increase the power of your capital.
Remember, also, that there is no income* or capital gains tax*.
Spread betting can take the hassle out of normal share dealing. Entry and exit to and from markets is simple, fast and reliable. Spread betting platforms are very advanced now with many new tools that were not available to clients a few years ago and from one trading account you have access to thousands of global markets and asset classes. Also, with a spread betting account you trade in one currency so for UK clients 99% of them will trade with stakes in pounds sterling which means they are not exposed to any currency fluctuations as all the profits and losses are in sterling. One advantage is the outright simplicity of the model. You buy or sell in a stake size and you make or lose that stake for each point move. Clear and simple. For day traders, swing traders, and other short-to-medium-term traders, spread bets should be more cost-effective than traditional share holdings.
We cannot stress too strongly that trading in this leveraged manner also works disproportionately in reverse. If the shares had fallen by 10% for example and you had closed your position, you would have realised a loss of £1,100 i.e. 54.7% of you deposit (Margin).
Finally in this section, it is worth noting that popular traditional brokers or on-line brokers typically do not offer the facility to sell stock you do not own (i.e. go short). Financial spreadbetting allows this feature and therefore is far more flexible. Consider if you had this facility in 2007 at the height of the market!
