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Spread Betting

Advantages and Disadvantages

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Page Summary:
Like any financial product Spread Betting comes with advantages and disadvantages. Find out what they are on this page.
The advantages

Spread Betting : Advantages

Spread Betting : Advantages & Disadvantages
  • Tax free profits - Spread betting is classed as gambling so profits are 100% tax-free. Another advantage is that you won't have to fill in any trading related information on your annual tax return.

  • No commissions or Stamp Duty - The spread bet broker makes his profit on the difference between the bid-offer spread, so dealing is not technically free. But if you trade shares on the London stockmarket is not necessary to pay the Stamp Duty at 0.5%. Saving 0.5% might not seem so much but it's a hell of a saving if you regularly short term trade individual stocks. See Secret 3 - The cost of doing business - It's more important than you think - which is one of our 10 Secrets to Successful Spread Betting

  • Leverage - It's both an advantage and disadvantage (see below). The advantage factor is where small movements in the underlying can translate into large profits as a percentage of money risked.

  • Trade with smaller amounts of money - The minimum bet size is usually £1 a point which is great for those starting out as any losses can be kept under control. See Secret 1 - Trade small positions when starting out - which is one of our 10 Secrets to Successful Spread Betting

  • One account - access to all the markets - With one single account you can have access to virtually all the important global markets. Trade Gold today, Vodafone shares tomorrow, the Japanese Nikkei and Google the next.

  • The ability to short sell - Selling short is where profits can be made from lower prices. For example, you could sell short the Dow Jones at 10,000 and buy it back at 9,500 for a 500 point profit. More on short selling here

  • Good liquidity - The spread betting firms will always offer a 2-way dealing price whatever the market conditions. This means traders can always take profits and losses.

  • 24 hour trading - Many of the world's bigger markets now trade 24 hours a day. And whereas you might not want to deal at 11pm, the ability to do so is always welcome.

  • Good internet software - Most spread betting business is done via online software and collectively the brokers have developed outstanding trading platforms. The software can also be used for charting, research, setting price alerts etc. See my review of the 2 best spread bet brokers

  • Plenty of training free offered - Many of the brokers offer their clients complimentary training courses, whether online, in print or informal 1-2 hour meetings. See Secret 10 - Beware of 'marketers' selling expensive trading courses and systems - which is one of our 10 Secrets to Successful Spread Betting

  • Controlled risk bets - Spread bet profits and losses can be open-ended, ie you never know how much you're going to make or lose when the trade is first initiated. But the brokers will also offer controlled risk bets where the potential loss can be fixed. These are more expensive than a normal trade but can offer peace of mind. More information on Controlled Risk bets.

  • Credit offered - Depending on who you are and your credit rating the spread betters can offer a credit account. To some this might be an advantage.

  • No currency risk - All spread bets, even those on non-UK markets can be traded in Sterling so there's never any currency risk or need to change Sterling into Euros or Dollars etc

  • Unique markets - It's not just the big markets available. Spread betting offer markets such as property as well as Binary Bets which are similar to fixed odds bets - more information on Binary Bets

Spread Betting : Advantages

  • Leverage - Leverage is similar to fire - it can be your best friend but also your worst enemy so it must be both respected and used intelligently. Don't forget the streets of Wall Street and the City of London are littered with good traders who lost it all because they used too much leverage....

  • Tax-free - Tax-free is only an advantage if you make profits. But if you lose the losses cannot be offset against capital gains made elsewhere.

  • Unable to bid or offer the market - With most financial products you can often buy at the bid price and sell at the offer. But with spread bets you'll always have to pay the offer or sell the bid and that can be expensive if a lot of trading is done.

  • Bid-offer spreads can be wide - The brokers don't charge commissions as their profit is built into the bid-offer spread. Some punters have previously complained the spreads are often too wide and this may be true. However, bear in mind that wide bid-offer spreads usually do the most damage to short term traders. See Secret 3 - The cost of doing business - It's more important than you think - which is one of our 10 Secrets to Successful Spread Betting

  • Credit is offered - Depending on who you are and if you've got a good credit rating the spread betters can offer credit accounts. To some this might be an advantage but to others it will only cause problems. My advice is simple - only trade with cash you can afford to lose and don't use credit
LearnMoney comment:
Far more advantages and disadvantages and that's obviously good. But pay special attention to leverage as it's like fire - your best friend but it can also be your worst enemy.

For this reason I'd advise anyone who's starting out in the spread betting world to tread carefully and bet the smallest stakes possible until you truly appreciate its power - Disregard this advice at your peril.

WARNING! - Spread Bet Broker Advice

There are good spread bet brokers and there are bad ones.

Having a good broker won't guarantee you profits but a bad broker will probably lead to losses as a combination of their gamesmanship and suspect software takes its financial toll.

So who do I recommend?

Simple, the 2 brokers I personally use for my own spread betting (and I've used them for years) -

FREE Report : How to Learn Spread Betting and Prosper
How to build the all-important trading experience
Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
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