Investors will probably frown upon the word betting when it is anywhere near a financial instrument. Most investors in the stock market are in for the long haul and employ a buy and hold strategy. While there are traders who go for a more short term strategy, they are typically few and far between. There is a way to get into the markets as a trader without worrying as much about which way prices are going and it is called spread betting.
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What is Spread Betting?
Spread betting is a derivative product and is regulated by the Financial Services Authority in the UK. With spread betting you are speculating on the price movements of a financial instrument. It could be a stock, currency, or a commodity to name a few examples. It doesn’t matter if the markets are rising or falling because you are betting on the spread, or the price between the price. When trading in the markets there is a bid price and an ask price. The value between the two prices is the spread. You do not take ownership of the instrument and rather just trade on the potential price moves only.
Benefits of Spread Betting
In the UK, spread betting is exempt from both UK stamp duty and UK Capital Gains Tax (CGT). However, tax laws are subject to change and depend on individual circumstances. Most traders will also be free of paying income tax on the gains unless they spread bet for a living. Another benefit of spread betting is the chance for a set payoff. Because there are only two possible moves the market can make, up or down, you know that you start off with a 50% chance of winning or losing either way.
Risks of Spread Betting
There is a potential risk of you becoming emotionally involved when spread betting. Because emotions run high and when you make a loss, you may place trades based on emotion rather than logic and analysis. With the potential that you could lose a significant amount of money, 1 in 5 traders expected to lose. There are a number of tools such as stop loss orders which can be used for your trades to help manage the risk. There are standard stop loss orders and guaranteed stop loss orders. Another risk is the risk that comes along with derivatives and any leveraged instrument. Leverage is a double edged sword and the risk of loss increases dramatically when it is used.
Would you consider spread betting as an option for your investment arsenal?
If you’d like to learn more about financial spread betting visit CityIndex.co.uk.
Disclaimer: Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks. Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary. Please continue to our full site disclosure for the risks involved with trading and investing in the markets.
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