Spread Betting is a tool that enables traders to profit from both up and down moves on a wide variety of financial markets, whether stock indexes, individual shares, currencies, bonds, and commodities such as gold or crude oil. What differentiates spread betting from other types of financial speculation is that ALL profits are 100% Tax-Free.
Spread Betting differs from fixed odds betting in that;
- you don't risk a certain amount per bet, and
- there is no fixed profit or loss
Spread Betting is Different From a High Street Bookmaker
For example the high street bookmaker may well offer you 10-1 on a certain horse, if you place £1 at those odds and win, you'll receive £10 profit (plus your stake back). If the bet loses then all you will have lost is the £1 stake.
But the profit and loss on a financial spread bet is always open because you're betting a stake, usually Pounds per point, on the direction of the market. For example, you may well be expecting the FTSE 100 index to rise and so decide to buy it at £1 a point using a spread bet.
If you bought the FTSE 100 index at 4200 risking £1 a point and then sold it when it rallied 50 points to 4250, your profit would be £50 (50 points x £1), and this is 100% free from capital gains tax.
But if the index moved lower and you subsequently sold your bet at 4175 to take a loss, then you'd lose £25 (-25 points x £1). And this is the difference between fixed odds betting and spread betting, your ultimate profit and loss with this style of betting is never known until you liquidate the bet.
Making Money From Falling Prices
Using spread bets a trader can also bet on a downward market by what is called selling short (for more information on short selling using spread bets click here). If you were bearish towards the FTSE 100 expecting lower prices in the future, then you could sell the index short at say the current market price of 4200, and then cover this bet or buy it back at 4100.
If your stake was £1 a point then your profit would be a tax-free £100 (100 points x £1). Of course your view may well be incorrect and the FTSE 100 rises, and so you decide to take your loss by buying back your down-bet or short trade at 4225, so losing 25 points multiplied by your £1 stake, a loss of £25.
Spread Betting is Flexible
Spread betting is very flexible and the Spread Bet brokers offer many markets and products to trade, all following the same principle of betting pounds per point. A further advantage to spread betting is that there are no commissions and if you're dealing on UK shares, NO Stamp Duty.
For the beginner the inner workings of spread betting can seem complicated to start with, but with the help of this website you will get all the necessary information to help you not only understand how spread betting works but also gain the necessary confidence to trade in this fast moving and exciting business.
