Advantages and Disadvantages

Advantages

Ability to trade a wide range of markets

Spread bets are offered on thousands of instruments including Shares, Indices, Sectors, Commodities and Treasuries. You can trade on all of the top UK stocks and some of the more popular small cap stocks as well as all major indices in the UK and overseas. This gives you easy access to popular instruments like Oil, Gold, Google, Sony, Volkswagon, the S&P 500, the dollar and much more. Many of these instruments either cannot be traded or are very difficult to access through traditional share trading.

Trade on Margin

This is also known as gearing or leverage. When buying shares in a company an investor must pay the full purchase price, so 1,000 shares for 250p would cost £2,500. When using a spread bet the client is able to create that same exposure but pay less cash. Typically the margin is 5%, so to open a position worth £2,500 the client only needs to pay £125 up front.

This means that you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining economic exposure to the relevant underlying instrument. This magnifies the profits against the initial outlay.

Make money when the market falls

With spread bets you are not actually buying or selling shares at all, you are only making a bet on which direction the share price will move. This means that you can ‘go short’ or bet on the price of shares falling. In traditional investing, private investors are not able to go short as you cannot sell something you do not own. Some brokers will make exceptions for extremely wealthy clients and for very few shares, but in general the only way to make money with traditional investing is for share prices to rise. This means that in difficult market conditions, traditional investors will be more likely to lose.

With spread betting it is equally easy to go short or go long across the full range of markets and instruments.

Costs

Spread bets are commission free, so are cheaper than traditional share trading. The added plus of needing no middleman means you will save time and money.

No Capital Gains Tax or stamp duty*

Profits from spread bets are not typically taxed as capital gains. Spread bets are also free from stamp duty.

Disadvantages

Trade on Margin

Also known as gearing or leverage, trading on margin is a double-edged sword. With shares, the worst that can happen to your £5,000 investment is that you lose the lot. With £5,000 of spread bets, your potential losses are not limited to your 5% initial margin of £250. Since £250 can give you exposure to a trade worth £5,000, if you use your entire capital to open up trades then your initial £5,000 can give you exposure to trades worth £100,000. However, a sensible stop loss policy or limited risk accounts enable you to limit any losses.

Tax cannot be offset

Although spread bets are free of UK Capital Gains Tax losses cannot be offset against capital gains you may have made from traditional share trading or other investment activities.

No perks

You don't pick up the perks of actually owning the shares; you are not entitled to vote or attend company meetings. However, with online share trading, most investors will hold ‘nominee’ accounts which also don’t entitle them to any perks. For anyone who is already trading shares online, this limitation of spread betting will probably go unnoticed.