If you’re looking for a versatile way to trade the markets in the UK, spread betting is a derivative strategy commonly adopted by market speculators. Using this approach, traders can attempt to profit from price movements without needing to own any underlying assets. This article will help provide all the information you need to know about spread betting in the UK while evaluating its benefits and risks.
What is spread betting?
Unlike traditional investment styles, spread betting enables traders to speculate on an asset’s price trajectory, without needing to own the asset itself. Like any other form of betting, this approach relies on specified outcomes being fulfilled, such as a company’s stock rising or falling as predicted.
Brokerage firms act as bookmakers of the derivatives world, setting the ‘bid’ and ‘ask’ prices for each instrument. The difference between these two amounts is known as the ‘spread’, which reflects the risk involved in making a trade, as it determines how successful you’ll need to be before any profits are achieved.
While there are additional risks involved in this style, spread betting is a tax-free way for UK residents to speculate on rising and falling financial markets. For this reason, it is a favoured investment alternative by some. Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
What are the main features?
By foregoing the responsibilities of asset ownership, spread betting offers a flexible approach to entering financial markets. This typically means quicker profit/loss realisation, as well as cost savings through the absence of stamp study and capital gains tax.
Spread betters also enjoy fewer restrictions when it comes to trading conditions, with brokers typically offering the following account features:
Leverage
To help magnify potential returns, traders can use leverage to their advantage. Leverage is like a loan offered by a broker to help traders increase their trading power for a specified amount of margin. However, it’s important to note that profit-and-loss is calculated using the full size of a position, not just the margin. This means traders could end up losing a lot more than their initial deposit, which is why a careful risk management strategy is essential.
Trade both ways
Unlike individual stock trading, spread betting allows traders to choose a ‘buy’ or ‘sell’ position, based on which way they think the market is headed. Otherwise known as going ‘long’ or ‘short’, this provides extra opportunities for those anticipating a downward trend. It also allows traders to take advantage of ‘hedging’, which is a risk management strategy involving the simultaneous buying and selling of similarly positioned assets.
Is it safe?
As a leveraged financial strategy, spread betting carries greater risk than traditional investment styles. Alongside established risk management techniques like setting stop loss levels, traders should also be mindful of the prospect of margin calls, or account closures, which can occur as a result of not being able to meet capital requirements.
To prevent losses exceeding an original investment, brokers will typically trigger a margin call so that users don’t run into debt. By borrowing at higher amounts, the likelihood of such actions occurring increases, meaning positions (and all-too-frequently accounts) can be closed on a single trade.
For this reason, it’s essential to provide adequate funding so that adverse price movements don’t prove too damaging.
Additionally, it’s important for traders to understand how spread size can affect the eventual outcome of a position. Even if the price has moved in a trader’s favour, it might not be enough of a movement to overcome the difference between bid and ask prices.
Spread betting in the UK
For those looking to take advantage of spread betting in the UK, the good news is that the industry is regulated by the FCA - a top-tier regulatory authority that helps protect consumers, and promote competition.
To help guide consumers, the FCA maintains an official Financial Services Register, which provides up-to-date information on licensed companies and individuals. If you’re being sold a spread betting product in the UK, and the provider isn’t on this list, then your skepticism is deservedly justified.
UK residents can also benefit from the tax advantages of spread betting, which is tax-free due to its classification as a speculative bet rather than an investment. This compares favourably with other trading types, like buying and selling stocks. It also provides advantages over other derivative forms, including Contracts for Difference trading, which is subject to Capital Gains Tax.
Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
Spread Betting can offer many advantages for traders, but it’s always important to weigh up the risks, as well as potential benefits. As ever, starting off small, and taking advantage of a broker’s practice accounts (if provided), will provide a good indication of whether or not this style is appropriate.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
