Spread Betting

Spread betting has been around for a while now but is still only used by a minority of private investors. At Digital Look, we see it as our mission to inform our readers about all aspects of investing. Spread betting (or spread trading) gives the private investor like you a wealth of new techniques and opportunities to exploit.

In this section of the site, you’ll find our brief introduction to spread betting below and a series of related spread betting articles available from the menu on the left of your page.

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A brief history of spread betting

Financial spread betting (sometimes called ‘spread trading’) can trace its roots back to the mid-1970s when a contract was created to enable people to trade the price of gold at a time when exchange controls prevented buying the metal itself without paying a high premium. The number of financial instruments available to trade soon increased.

In the nineties, advances in technology (such as the internet) made financial spread betting a more viable option for private investors and traders.

Now, spread betting is becoming far more mainstream – it’s tax free status* and improvements in platforms means it’s become an important tool in many people’s investment strategies.

In 2008, Digital Look launched Marketmaker:Investor Edition with our partners CMC Markets. Our aim is to provide private investors like you with the tools and research data you need to succeed in financial spread betting.

How does spread betting work?

Spread betting makes it easy for retail investors to gain exposure to shares, commodities such as oil or gold, foreign currencies, stock market indices and a wide range of international companies.

It presents people with the opportunity to trade on the price volatility of commodities, indices, currencies, sectors and individual shares without actually owning any stocks or shares.

Spread betting companies act like market makers, quoting a price at which they will buy shares, for example 50p, and a price at which they will sell, maybe 52p. The difference between the ‘buy’ and ‘sell’ price is the spread, hence the name.

The idea of leveraged trading, or trading on margin, can give investors much greater exposure to their chosen market or company. For example, it could cost you £20,000 to buy 1,000 shares priced at £20 each. You could gain the same exposure through a spread bet by placing an order to buy at £20 a point. With a typical margin, or deposit, of 5%, you would pay just £1,000. There is usually a small financing charge to pay for trading on margin.

What are the main benefits of spread betting?

Probably the most significant aspect of spread betting is that clients can make a profit from both rising and falling markets. It gives you the opportunity to go short, or sell something you don’t actually own, in the hope that the price will decrease and you can buy back at a lower level and pocket the difference.

It enables you to buy (go long), but more importantly, sell (go short) even if you don’t actually own the physical shares. Spread betting does not involve any share ownership. You are buying or selling a contract with the spread betting provider.

It is cheaper than traditional share dealing as trades are commission free. Profits gained from spread betting are free from UK capital gains tax (CGT) and trades are free from stamp duty*.

What are the main risks of spread betting?

Spread Betting is a leveraged product and carries a high level of risk to your capital. It is possible to incur losses that exceed your initial investment. Please ensure that you fully understand the risks involved and seek independent advice if necessary.

Clients can pay a little bit extra for a Controlled Risk Trade, or Guaranteed Stop Loss account. Stop losses are often used in traditional share dealing, but Controlled Risk Bets (CRBs) offered by spread betting providers enable you to place a stop order at a predetermined level that will guarantee your maximum loss. Therefore you have a known ‘worse case scenario’ should the market move against you, which acts as an insurance. But as CRBs are guaranteed, unlike stop losses, there’s a small premium to pay which takes the form of a slightly increased spread.

Losses cannot be offset against capital gains you may have made from traditional share trading or other investment activities.

Finally, you should ensure that you choose a spread betting company that is regulated by the FSA. Digital Look is an appointed representative of CMC Spreadbet Plc. CMC Spreadbet Plc is authorised and regulated by the Financial Services Authority.

Spread Betting Resources

*Tax laws may change

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