We find that financial spread betting is just one of the trading options available to retail investors and may not be suitable for everyone and every trading activity, but at the same time if it is used correctly it represents a good and easy-to-understand trading option.

Therefore, before you start trading you need to evaluate your trading needs and what you are trying to achieve.

Financial spread betting is a flexible way to trade the financial markets without holding the investments directly in your hands it is a margin (leveraged) investment vehicle allowing investors to trade and speculate on the financial markets. Private investors open thousands of Financial Spread Betting accounts a month to take the advantage of the current tax policy (Financial Spread Betting is CGT and income tax free). Spread Betting has experienced a big grow in the last few years and the competition between companies has become vigorous to attract new customers by offering tighter spreads and better customer service.

Placing a spread bet gives you an instant access to the price of the financial markets, allows you to take long or short positions without the stockbroker’s interference and offers you to trade all the different financial markets (equities, individual shares, commodities, currencies, and bonds) from a single account.

When you spread bet, you do not buy shares or commodities but instead you make a bet as to which way you think the market or share price will move. You can bet per penny or point movement – the amount you wish to bet is known as the ‘stake’, and can be as little as £1 per point. It is important to understand that £1 bet on shares represents 100 shares (how many shares do you need to buy to make £1 if the share price goes up 1 penny? 100 shares).

Experienced investors use financial spread betting as an additional trading tool as the spreads (commissions) are low. Alternatively, many investors use spread betting to hedge their existing share portfolio. For example, if you have some shares, which are decreasing in value in the short-term, you could ‘sell’ the value of the share using a sell bet.

You do not need to be an experienced investor to spread bet, but you DO need to research the products that you wish to trade and be aware of the risks associated with spread betting. Many individuals, experienced and new, use technical analysis to guide their investment decision. All spread betting companies provide some sort of charts and technical tools, use the comparison tool and read reviews to find out who provides the tools you need.

The Spread Betting Advantages

Before jumping to an abrupt conclusion about financial spread betting it is important to understand what spread betting is and what it isn’t. First, let’s start by looking at the benefits it can offer to traders and how to take the full advantage of what it has to offer.

The main advantages of financial spread betting over other products:

Go Long and Short – unlike share trading (where you can only gain from rising markets), spread betting gives the ability to profit from rising and falling markets.

There is No Stamp Duty – saving 0.5% compared to a traditional share purchase.

Very Easy to Understand – no jargon and complex calculation as options and futures trading.

The Ability to Trade on Margin – you only pay a fraction of the full cost of the trade; therefore bets can be placed with relatively small initial outlay.

Tax Free – financial spread betting is considered to be gambling (even though it’s regulated by FSA) and thus, the gains are tax free in the UK.

More Range of Markets – individual equities, indices, commodities, forex and much more. Virtually every market is now covered by spread betting (tradable markets vary between the brokers).

Having Instant Execution – all the trades placed are contracts between the client and the spread betting company; therefore there is no delay in routing the order which allows an instant execution in markets.

With Extended Trading Hours – some spread betting companies are open 24 hours a day which is not the case to normal market trading hours.

About No Currency Risk – brokers allow traders to place their bets in the currency of your choice, thus eliminating the risk of currency fluctuations.

Financial Spread Betting Disadvantages

Having seen the benefits of financial spread betting it is vital to understand that it has its own disadvantages as well and cannot be used for trading every financial product. You can only realise the full potential and pitfalls of spread betting when you thoroughly understand how it works and when it is appropriate to use it.

The main disadvantages of financial spread betting over other products:

About Margin Product – the losses can be higher than the initial deposit or capital. Leverage is a double-edged sword, you get higher returns on investment, but, if not used with caution, can cause considerable losses.

Commission Fee Is Not Transparent - spread betting companies build their commission into spreads, therefore it’s difficult to understand and calculate.

Having No Voting Rights – as you do not physically own the shares you don’t have voting rights on important company issues.

The Tax Regime – losses on bets can not be offset against future capital gains.

Now you have a better understanding of financial spread betting and what pros and cons it has. To complement this knowledge we will closely examine how spread betting differs from other investment options like share dealing, CFD trading and fixed odds financial betting.

Financial Spread Betting Markets:

As it has already been mentioned, one of the biggest drivers behind the rapid growth and popularity of financial spread betting is the wide range of trading instruments available to retail traders. Range of markets offered by spread betting brokers has considerably grown over recent years and now you can virtually spread bet on anything. Gone are the days when it was a privilege of wealthy and hedge funds to trade commodities and currencies, now every trader in the UK (and some other European countries) can trade all these derivatives from the comfort of their own homes.

Some spread bettors limit themselves to markets they are familiar or feel comfortable with but it doesn’t have to be the case for everybody and it is always advantageous to have a wide range of markets to trade; and as you get more experienced you can start trading more market and take advantage of the current trends.

The following instruments are provided by every broker:

Indices – arguably the most traded market when it comes to spread betting and the best market to start with for novice traders.

Currencies – Forex (foreign exchange) is the biggest financial market and no wonder it has drawn a wide range of traders.

Commodities – historically, spread betting started with gold trading and now it is possible to trade a wide range of commodities.

Individual Shares – with the recent developments in spread betting industry it is possible to trade domestic (European) shares as well as some exotic, like Indian and South African stocks.

Interest Rates and Bonds – interest rates and bonds are the most neglected market and very often completely ignored by novice traders.

Even though the range of offered markets varies considerably from broker to broker major markets are represented by every spread betting company. With some companies you can even request new markets to be added when needed.

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