How to get started with spread betting

by John Fitzsimons on 17 December 2010  |  3 comments
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Guest blogger Joshua Raymond of City Index explains how spread betting works, and how to go about making some cash from it.

Guest blogger Joshua Raymond of City Index explains how spread betting works, and how to go about making some cash from it.

Spread betting is a tax-free alternative to speculating on the price movements of shares, indices, FX, commodities and other financial markets. In spread betting, you do not physically own the underlying instrument. You are simply trading on the future direction in which you believe a market may move.

For example, if you thought that the price of the FTSE 100 was set to rise, you could buy the UK 100 spread and your profits would rise in line with each increase on the UK 100 price. Similarly, if the UK 100 was to fall, this would net you a loss.

What are the benefits of trading Spread Betting? 

1. No Capital Gains Tax*
Currently in the UK, all profit made in spread betting is free from Capital Gains Tax (CGT). This immediately saves you a significant percentage of your profits that you would normally have to pay in CGT if you were share dealing, for example.

2. No Stamp Duty*
In spread betting, as you do not physically own the underlying market when you buy or sell a position, you do not currently have to pay Stamp Duty in the UK.

*Tax laws are however subject to change and may differ depending on your circumstance. Please seek independent advice if necessary.  

3. Commission Free
All spread bets are free from commission. There is however a widened spread and this is one of the main costs of placing a spread bet. 

4. Leverage
All spread bets are leveraged (or margined) which essentially means that to take a position you only need to deposit a small percentage of the full value of your trade. For example, if you wanted to buy £5,000 worth of Company ABC shares and you are charged a 10% margin rate, you would only need to deposit an initial £500 (10% of £5,000) to open the trade. There are, however, risks associated with increased leverage, which I'll come to shortly.  

5. Go both Long and Short
You can trade both long (buy, expecting prices to rise) and short (sell, expecting prices to fall) to ensure that you can make the most of market movements, regardless of whether prices rise or fall. For example, if you thought the S&P 500 was set for a fall, you could place a sell spread bet on the US SP 500, and your profits would increase with every fall in the US SP 500.

6. Range of Markets
Spread betting gives you access to over 15,000 markets including shares, indices, FX, commodities and bonds all from the same platform. This means that you can trade different markets that you may not have considered before, until you find the market that is right for you.

What are the risks? 

As spread betting is a leveraged product it involves the risk that you may lose more than the amount of funds you hold in your account. This is due to the fact that while you are only required to deposit a small margin to trade, your true exposure remains the full value of your trade.

For example, if you were to place a £5,000 spread bet on Company ABC and there is a margin rate of 10%, you need to deposit an initial £500. However, the full exposure of your spread bet remains the value of the trade i.e. £5,000. Should your position go against you, you run the risk of losing more than the initial £500 deposited and may therefore have to deposit additional funds at short notice to maintain your position. As a result, spread betting may not be suitable for all investors.

Please seek investment advice if necessary.

How can you manage your risk? 

The best way to manage your risk is by using stop losses. A stop loss is an order to automatically close a position when it gets to a specific loss level. For example, if you have a buy position on Company XYZ at 500p and want to ensure that if the position goes against you, your losses are curbed at 450p, you can use a stop loss to achieve this. If the price of Company XYZ were then to fall to 450p, your position would then be automatically closed to prevent you from incurring further losses.

There are two types of stop losses: standard and guaranteed:

Standard Stop Loss

A standard stop loss is free of charge and available on all markets and will close out your trade at the best price available in the market, once triggered. Should market prices gap (i.e. slippage), this could mean that your trade is closed out at a price different to that of your stop loss level. This means that a standard stop loss does not provide 100% risk management protection.

Guaranteed Stop Loss

A guaranteed stop loss however guarantees to close out your trade at the level specified, regardless of market gapping. Therefore, guaranteed stop losses are the most efficient way to protect your trading risk. Please be aware that for guaranteed stop losses there is a small charge and they are not available on all markets.

What markets can you spread bet on? 

There are over 15,000 markets available to place a spread bet, all from the same platform including:

• Indices
• Shares
• Sectors
• FX
• Commodities
• Options
• Bonds
• Interest rates

Joshua Raymond is market strategist at City Index