Newcomers to spread betting are sometimes confused when they see it referred to as spread betting trading, or as spread trading. The question is, is there any difference between spread betting and spread trading? The answer is no, not in practice, but the semantics are important to some people.
Perhaps the best explanation I’ve heard of this is that spread trading is what the participants do, and spread betting is what the providers supply. When you call the practice spread trading, it infers that there is some trading skill involved in selecting and placing the orders, and is inclusive of the fact that this practice is mainly on the financial markets, where trading is accepted and acceptable term. In other words, the market participants want to refer to the respectability, and the need for research and expertise, just as with stock traders, futures traders, etc.
On the other side of the fence, the spread betting companies must insist that what you do is betting on the financial markets. This is for the simple reason that betting carries greater benefits than trading, and those make it very attractive to the general public. You probably some of the benefits of spread betting when compared to traditional financial trading, but I’m going to spell them out for you.
When you win a bet, your gains are not subject to capital gains tax. Of course, they are also not taxed as employment income, so basically you don’t pay taxes on spread betting gains. If you are a regular stock investor trading on stocks and shares, you will be charged stamp duty on each purchase and sale. If you choose to trade using a spread betting account, there are no actual shares bought or sold, so no stamp duty is payable.
The other feature of spread trading is that you have simply one account to cover whatever you want to spread bet. The obvious markets are not the only ones that you can access, although they are all covered. You can spread bet on shares, and enjoy much more leverage on the amount of money you have than if you invested directly. You can also bet on market indices, such as the FTSE, and whether the value of these will go up or down. Depending on your spread betting provider, you also have a choice of a number of other markets.
You can usually find a number of commodities such as gold or oil listed, and your bet in this case is similar to trading futures, except you can choose the amount that you stake and do not have to contract on a standard weight of product. Forex currency exchange rates are also included, along with more unusual topics such as options values, and house prices, etc.
So whether you call spread betting trading or not, it is an identical process. This method of speculation is gaining in popularity because it is so easy to do and you simply need to learn how to identify the best bets in order to make a profit.
It is no shock that spreadbets and contracts for differences have now become some of the most popular traded products and a number of highly successful providers now share between them around one million accounts. Both products permit clients to take a market position on what is happening in the financial markets with minimal capital outlay and neither are subject to stamp duty. Spreadbets have of course the additional benefit of allowing clients to receive any profits free of capital gains tax.
In the past people who spreadbet used to be stock brokers, bankers and professionals such as doctors and lawyers who use it to speculate with their personal savings however these days the product is much more diffuse and thus the people who are attracted to the product come from all walks of life including self-employed, students and house-wives!
The freedom, speed and relative simplicity offered by online platforms make them a better option for private traders than any other method and this has allowed spread betting to grow rapidly in popularity. Spread betting firms make markets in which bets can be placed on almost anything
The variety of assets you can trade is also extensive, including thousands of global shares, major indices and commodities, or fluctuations in interest rates and currencies. You can even bet on niche commodities such as orange juice or timber, although this is not recommended for starters as the bid-offer spread can be large. It does not really matter whether prices go up or down because punters can bet either way – and win or lose – in both directions.
Most private traders and investors use this method of trading to attempt to profit from short-term market movements, which of course is a highly speculative and risk activity. Because spreadbets are placed on a ‘per point’ basis, whereby one’s gains or losses are amplified according to how far a market moves, gains (or losses) can be rapidly amassed which is why risk management is so important.
How to Choose a Spread Betting Broker: FSA Authorisation
In the UK, this is possibly the most significant deciding factor. The Financial Services Authority (FSA) is the regulatory body that enforces legal trading practices and it is important that every spread trading company is registered with the FSA. Ensure that your broker is able to provide the register number, as this will help prove the broker’s legitimacy. This is particularly relevant in the online arena where scam artists hide behind professional-looking websites and false testimonies, easily swindling many a gullible investor. The good thing, however is that most UK-based spread betting brokers tend to be registered with the FSA, but being cautious never hurts.
How to Choose a Spread Betting Broker: Commissions and other Costs
Most investors realise that provider bid-offer spreads can sometimes be sizeable. Add to that any interest payable and you have a chunk of profit lost in terms of fees alone. Researching the bid-offer spreads and related costs charged by each spread trading company can help retain the most cost-effective brokerage service.
How to a Spread Trading Company: Market Coverage
Veteran investors understand the need to diversify their investment portfolio, and this is not less true in the spread trading arena. It is obviously important that the broker you choose provides a diverse market for you to trade in. Signing up with a spread betting company is a long-term arrangement and traders will do well to go for a broker who has a good exposure in a variety of markets, from UK and European indices to the US and possibly other international markets too. This can prove to be a good idea even if you prefer to trade locally, for the global market is in a state of constant flux and it always helps to keep your options open.
Comparing Companies: Terms of service:
Before signing up with a broker it is crucial that you understand the terms of service so you can estimate actual trading costs. Some brokers may offer promotional rates for first-time customers and then charge their regular rates after the initial offer period. The best way to getting around this is to actually spend time perusing the terms and conditions of each broker of interest. This may be quite time consuming but can help you weed out these misleading services ensuring that you effectively save on commissions in the long run.
As with all things financial, there might be a phase of trial and error before you decide on the best broker. Setting up a spread betting demo with the broker can be the ideal way to ascertain that the particular brokerage service is in fact the perfect fit for your needs.
I’m currently using Ayondo and trying to become a top trader there so I could then have other traders follow me and earn me some moolah in the process. I like Ayondo for several reasons including:
- Ayondo won’t come after you if your balance ends up negative (Ayondo’s no-negative balance policy)
- Ayondo insures personal accounts up to £500,000 and thereby goes far beyond the existing Financial Services Compensation Scheme (FSCS) guaranteed capital threshold. This means that your money is safe with them.
- I also like Ayondo for the fact that you can control your leverage (you can even trade with no leverage if you want there) and for the fact that financing is only charged on the borrowed amount unlike other providers.
The spread betting market has become extremely saturated, adverts left right and centre, commission-focused jobs to get people to sign up to new accounts with all sorts of new/dodgy providers, free bets being offered, free services and up to zero spreads… I’d be quite glad to see it taper off honestly, as people come to realise how few people really “win”, I’d imagine the people who’ve been hurt the most in the markets these days are the ones who’ve lost money spread betting. It can give market participants a bad name with the public, and certainly doesn’t help with the “gambling” image, when people treat it recklessly.