More than 20 years ago Stewart Wheeler, the founder of IG Index, hit upon the idea of trading on the price of gold and not the actual commodity itself and hence gave birth to spread betting. Today, this investment technique offers access to markets previously only open to the major institutions.Many consider the spread betting market to be one of the most attractive, easiest and cheapest options for anyone who fancies the idea of playing the markets for profit.
Although you may “trade” instead of simply laying a bet and once the bet is live you “hold a position”, financial spread betting is essentially gambling, as is the case with many other investment vehicles and techniques.Your own money is put at risk, betting on a certain outcome and hopefully resulting in a return on that investment.One of the other main attractions of financial spread betting is its tax-free status.Because your transaction is not a trade but considered to be a “bet”, any profits are free from UK Capital Gains Tax and income tax.You’re also free from stamp duty because you are not physically buying a share when you do trade..
Spread betting has other advantages.. It’s a marginal activity, meaning that bets don’t have to be huge sums to be potentially very profitable. For example, brokers may quote a share price movement (the spread) for a firm of around 351p to 352p, but if you think the share will end higher you could buy at £100 per penny movement at 352p. If the firm ends up at 360p you have won 8 x £100.If it ended the day down two points from the buy price at 350p, you would have to pay £200, however, to create the same potential return by simply buying shares in that firm, you’d have to part with about £35,200.00
Beware though, as the upside of relatively small sums for a large exposure can also lead to the downside of huge losses. With spread betting requiring deposits from as little as 3% of the equivalent direct investment value, it only needs a slight movement in the share price in the wrong direction to leave you (the punter) owing the bookie (spread betting firm) substantial amounts of money. True, you can instigate “stop loss” triggers whereby a bet is automatically closed if a share price or other index plummets beyond a certain level, effectively limiting any loss. However, it’s still a loss and you still have to pay. Even with all those caveats, spread betting provides one of the simpler and potentially very rewarding starting points for any budding trader.
