Beginners Guide to Spread Betting
New to Spread Betting?
The Spread Betting Trading Centre has compiled the following guide
to explain how Spread Betting works
Understanding the Negatives
- Spread betting companies often allow traders to bet on margin, this means that traders are often betting with a lot of money that they do not have. This can be very risky, as it can increase losses substantially, and often the better won’t realise how much they are actually betting until they have to repay their losses. Brokerage companies are also very vigilant when it comes to debt collection, and will often charge very high interest rates to traders who owe them money.
- Spread betting losses are not deductible from capital gains. The FSA places spread betting under the category of gambling, and therefore does not charge capital gain taxes to it, or give tax benefits to losses. Therefore if you lose a sum of money on sports betting and make money by trading stocks, you will still have to pay the full capital gains taxes on the gains realised from the trading.
- Assuming efficient markets, it is nearly impossible to guess which way a stock will move. This means that there is a better chance of losing on a spread bet than winning. In order to win you must cover the spread, so the odds are slightly favouring the brokerage. But they are still better odds than simply guessing on a stock, because there are no brokerage fees.
- Every time you roll over a bet, it becomes more expensive. If you are planning on holding the bet for longer than 6 months, then normal investment will be less expensive. Every spread bet has a rollover (expiry) date and there are costs every time a bet is rolled over. Spread bets should only be made on a short term (less than 6 months) basis.
- When placing a spread bet on a stock, you are not actually purchasing any stock and therefore do not own any of the company. This means that you do not receive any of the advantages that stock holders receive, such as voting rights and dividend payments (where applicable).
- Long term investment is not possible in spread betting. Each spread bet has a predetermined lifespan, and expires at a certain time. Traders are able to close their bet before this date, but they cannot extend it past the date. If the spread bet is losing when it expires, the better must realise the loss. In conventional investing, the investor may hold on to his investment as long as he wants and there is no loss or gain realised until he sells his stake.
Note:
Spread betting is very risky, especially when betting on high margins. Many people enter spread betting ignorantly believing that there are no costs, and a 50/50 chance of winning. This is not true! The costs are in the spread, and the spread gives the spread betting company an advantage on all bets. This is how the spread betting companies make money. In order to be successful in spread betting you must shop around, look for the tightest spreads and do your research before you place a bet.
