What are the key features of spread betting?
Some of the things to consider when looking to trade on spread betting are:
- Tax free profits
- What is the trade on margin
- Is there a stamp duty on stocks
How can you pick the best financial spread betting broker in the UK?
There are some important criteria to compare when looking to switch or open a spread betting account. Those are:
- Mobile Apps
- Market Range
- Added Value
- Credit Accounts
- Social Trading
It is important that your spread trading broker is authorised and regulated by the FCA?
Having a spread betting broker that is fully authorised and regulated by the FCA is really important as in this case your funds will be protected under the FSCS. The FCA also ask brokers to report regularly and have the necessary compliance procedures in place so that all customers are treated in the right and fair way.
How can you check how wide a brokers spreads are?
You can check in our spread betting broker comparison table how wide a companies spreads are. Checking brokers spreads is really important as the spread is a very big cost to you as a trader. The smaller a companies spreads are the lower your trading costs will be and higher the potential profit.
What is the spread in trading?
The spread is the difference between the price at which you can buy and sell a position. So if you are an intraday trader who is making many trades than the spread can really have a big impact on your profit and losses and you will need to check carefully as it does change from broker to broker.
Can you trade with your mobile on the go?
It is important to pick a spread betting broker that will allow you to trade on the go with your mobile and/or trading devise. Having the opportunity to always stay connected to the market to check prices and open and close positions is a very useful added value so it is an important adds on and you should check that the broker you are going to have will offer this.
It is important to check what asset classes your broker covers?
Generally the more asset classes your brokers covers the better it is. Some brokers only focus on one product like for example forex while others allow you to cover the entire market. The majority of the bigger broker allow you to trade more stocks and asset. By having a broker with better market coverage there will be more opportunities so it is an important criteria to consider when switching or opening a new account with a broker.
Should I only consider the most established brokers?
Although there are always new entrants in this very competitive industry, generally the more established is a spread betting broker, the better they will be able to deal with issues. The financial markets are very complex and having experienced brokers at your service it is vital to help you when trading errors appears and even to get used to new products.
Should you go with a broker that offers added value?
Despite most brokers offer pretty much the same access to the market by picking a spread betting broker that offers lots of added values you will have a significant edge when trading. Having access to live news, technical analysis and sentiment indicators will allow you to have a better overview of the market and overtime making the better informed decisions when trading.
You should pick a broker that offer credit?
There are some brokers that offer credit. If you are a trusted client you can make a trade even if you don’t have a positive balance in your account. Having a bit of credit can be useful if you want to place a trade and you don’t have the time to wait for the funds to be added. Again it is worth considering this when picking a broker as it adds another opportunity.
Should you follow profitable traders through social trading?
It is a very good profit opportunity following profitable traders through social trading. Social trading is very popular at the moment as it allows you to execute the same trades as the best customer of a specific broker. Not all brokers allow social trading but the one that do will show the performance and trades of traders that usually make money. If you are a beginner or if you just want to exploit talented traders work this is a very good tool and it is worth taking a look at it.
What are the reasons to try spread betting?
There are many good reasons to start on spread betting and of course the main one is to try and make a consistent profit overtime. We have summarised some of the key pros of spread betting:
- Spread betting allow investors to make lots of money. Having said that there is an equal amount of risk so it can also cause huge losses
- Profits that are made from spread betting are not taxable in the United Kingdom at this moment in time
- Investors can access to worldwide financial market trading from one location at very low costs
- Trading can be an exciting way of making money and also intellectually challenging
- You can start with spread betting with a rather small amount of investment
- If you going short you will also profit when a market is falling which opens up a lot more opportunities
- You can trade 24 hours a day and some markets are also available on the weekends
- You can hedge your longer term growth investments with spread betting
- With spread betting you can have a more diverse investment portfolio
- You can trade also on the go as there are many mobile apps which are offered at no extra charge by the top brokers
Is profit from Spread Betting Free From Tax in the UK?
One of the greatest advantages of spread betting is that all the profit you will make are free from tax in the UK. Yes, it is correct. Spread bettors are in fact exempt from stamp duty and capital gains tax. How this is possible? The reason is that they are considered to be derivates product: investors in fact are not buying a security but they are betting on what its future price will be. The fact that there is no taxation makes a huge difference to your potential profits.
How more profit I can make considering spread betting is tax exempt?
So with spread betting you can possibly earn an additional 28% or 18% return on any profits. Capital gains tax in fact it is at 28% or 18% (this depends on your personal circumstances) on your profit if you buy or if you sell your shares. In addition to this there is also a stamp duty (which is a tax at 0.5% currently) that is applied to all shares that are bought in the UK. Well, spread betting is exempt from all of this and for this reason it is a much more profitable choice than stock broking for example (as in that case there is an underlying security that is bought and therefore it is taxable).
Is it true that with Spread Betting the more you trade the less you pay?
Tax savings are one of the main reasons why spread betting has to be considered. Another advantage is also that it is leveraged: this means that you only need to place a small deposit in order to start speculating. For example you can already start trading with £500 if you are using a margin or leverage of 10%. Compared with stockbroking this is a big difference as in that case you would need to pay out £5,000 to open a trade for £5,000 of shares value. So in summary with spread betting you need a lot less initial capital to start trading which basically allow you to have a much wider access to the markets.
The next question is if you spread bet with a 10% margin for example who is paying for the 90%?
The answer depends on what is the provider of the spread betting services who is basically covering the trade. The size of the margin will be different depending on markets and providers: normally the margins tend to be lower on more popular markets. Leverage is often seen as a great advantage of spread betting and this is true if the markets move in your favour. You also have to remember tough that if the market moves against you, the leverage will also magnify the risk and you can end up losing more money than you have deposited to open your trade.
Can you profit while others lose with Spread betting?
The great news is that with spread betting you can profit when there are situations of panic selling caused ofter by negative reports. The reason is that spread betting offers the opportunity of short selling so you can get a positive outcome by betting on a fall in the market’s value. If you get ahead of the market in that sense you can make a potentially very big return with spread betting.
How does short selling work when spread betting?
Basically when you short selling you sell the security before buying it again once the price has dropped and you get a positive margin in this action. If you not clear how you can sell shares that you don’t own than the answer is that your broker in this case is lending the share to you when you are short selling. It means that those shares are than sold immediately on the markets. If the market fall, you can than buy the same number of shares which you can pass into your lender so that your debt is settled. Any difference in price between the original selling price of the asset and the cost to buy that asset back will be your positive margin. But let’s do a real example to make it more alive:
Let’s suppose that Barclays’ Group current trade price is a value of £73 for each share. Now you believe there are reasons why those shares will fall soon so you short sell 1,000 shares in the company for £73,000. Now imagine that Barclay’s half-year profits are release and the news is disappointing so that the price of shares drop to £72.50. This will basically allow you to return the shares to your lender who will accept the amount of shares that they lent out regardless of how the value has decrease. The difference between the selling price of the share at the start of your trading activity and the price that you will need to pay to buy them back will be your profit. In the example it will be £500.
What are the risks when short selling with spread betting?
Although as we have seen short selling can offer great advantages you also need to consider that the market can go against you and theoretically the price of a security can continue to increase with no limits. Due to risks involved you should always implement guaranteed stops on short positions.
Why do investors short sell?
As you might be able to understand investors tend to short sell for two reasons. Some traders have a feeling that a particular market is about to fall while others might short sell as a way to hedge their risk.
What can you trade in spread betting?
When you analyse a market you would need to decide to bet on a fall or a rise in spread betting. With spread betting you have the opportunity to trade on thousands of markets so the opportunities are endless. The markets can different from provider to provider however generally you might be able to speculate on:
- Interest rates
- Foreign Exchange
Can you trade 24/7 on spread betting?
Absolutely and this is another great advantage of spread betting. So your opportunities are not restricted only on market’s standard trading times but you will also be able to trade on events that are outside. Oil is one of the best examples of this as Saudi Arabia has huge influence over the oil market and any decisions that are taken outside normal trading hours can have huge sudden fluctuation overnight.
What are the potential risks of spread betting?
As we mentioned throughout you need to consider that although spread betting brings lots of great opportunities, you can also lose more than what you have deposited initially. You might have seen this phrase often on brokers’ websites but let’s take a look at what exactly means.
Trading providers do make clear that traders can actually lose more money when they do some spread betting activity than they originally put down as a deposit when starting the trade. This is due to the fundamental difference between stockbroking and spread betting:
Stockbroking – if you buy shares that are worth £1,000 and than the market crash you lose all the £1,000 as the shares will be worthless. In this case however you won’t lose more than the £1,000.
Spread betting – if you put down £1,000 but the market than start to move against you you could not only lose the money you have deposited but if you don’t have the right risk management in place you can lose lots more.
How can you avoid huge losses on spread betting?
Although the spread betting can be very costly indeed there is no need to worry as there are ways to control your risk and we will explain how to do it. Eventually it is all down to risk management and leverage works and you will be able to learn how to lock in profits and cut off large losses. What you need to know is that spread betting does represents a greater risk than trade in funds, bonds and shares and that spread betting should only be used as a part of your investment overall strategy. In this case you will be able to lower your trading risks overall as a result.
How to make a first trade on spread betting?
Now that we have clarified the advantages and disadvantages of the spread betting let’s spend some time to take a look at how you can begin to place your trade on a spread betting platform.
Just to refresh the concept that spread betting is a trade where you can speculate whether a security’s price is going to fall or rise. So first of all you need to pick up which security you want to spread bet on and than you will receive a quote from your provider. The way this works is that you ‘sell’ price and you ‘buy price.
Let’s do an example so we get it clearer: if your spread betting provider offers you shares in Barclays at a price of 205/206 it means that the left value is its sell price and the right value is the buy price. Now if you think that the market will go up (or go long) than you will bet on ‘Buy’. If you think that the market is going to fall than you will go short and basically place a bet on ‘Sell’.
So after you decide which position you are going to take in the market, you will need to select how much you are going to commit to the trade per point of movement in the market. A tick, or pip or point is the measure of the security’s price movement. For example for equities one point normally equate to 1p while with indices a point equals one point in the index value.
Once you have place the bet you just need to look at how the market move and whether it goes up or down. The more it goes in the direction you have selected the more profit you will make from the trade. Having said that if a trade is going towards a profit, before you make money you will have to overcome the security’s spread which is the cost required to open a trade and basically the commission that you pay to the spread betting provider.
What is a Spread?
The spread is the difference that exists between a security’s buy price and sell price. Normally most spread betting providers will add a margin over the usual sell and buy market in order to create the spread. For example a Vodafone share price to sell at 100p and to buy at 102p might well sell at 98p and buy at 104 via your provider. So in order for you to make a profit when spread betting you need to first overcome your spread’s cost than you have break even. Let’s say your spread betting provider offered Barclays shares with 204/206 spread and you decide to buy with a bet of £10 for every market movement point, you need the selling price to increase by 3 points up to 207 before you can make a profit of £10. With 2 ticks you break even.
What are the factors that determine spread width?
There are different factors that can determine spread width but the two key ones are volatility and liquidity.
1 – Liquidity – this refers to the security’s volume of trading every day. This can vary a lot as there are some securities that are constantly traded while others only trade a couple of times a day. Normally those securities that trade in big quantity have a narrow spread. Those securities that do not attract many trades have bigger spreads because the broker struggle to find buyers or sellers and therefore require higher amount of commission to manage the transaction.
2 – Volatility – this refers to the movement size and basically to the uncertainty in the market. If in a market we see times of huge falls or rises it means the market is volatile and this is reflected to the spread that is wider as the participants are not willing to enter trades when the price is moving so rapidly. So when a security is popular and the market
So generally when you trading with wide spreads it means that the market has to go more in your chose direction for the trader to make a profit. So the size of the spread is really important and a narrow spread is the best situation to be for a trader.