Spread betting is a highly cost-effective way of investing in the stock market, and like any kind of investing, it’s easy to get started and hard to master. Some key advantages of spread betting make it a potentially lucrative form of investing.
When you trade in stock, you’re doing so with the expectation (or the hope) that you’ll be able to sell the stock at a higher price than you bought it for. Of course, this isn’t always true, and it means that in a falling market, there may be fewer opportunities to make money. Investing via spread betting offers an opportunity to change this. Spread betting is a variation on traditional investing that gives you the chance to make a profit in any kind of market, whether it’s rising or falling.
With spread betting, you don’t buy stocks or shares in the market. Instead, you’re essentially making bets on what the market will do. For instance, instead of buying shares in a particular stock, you instead bet that the stock will rise for the duration of your bet. The higher the stock rises, the more money you make. If the stock sinks, however, you lose your investment—and the more it sinks, the more you stand to lose.
The hidden tax advantage to investing via spread betting is right in the name. In the UK, income from gambling is 100% tax free. And spread betting is classed as a form of gambling, so any money made from it is also tax free. In addition, spread betting doesn’t incur any stamp duty or commission fees, so it’s a very tax-efficient way to invest.
There is a down-side to this, of course. While you get to keep more of your profits, the tax-free status of spread betting also means that any losses you suffer can’t be offset against any capital gains you’ve made on other investments.
Leverage makes your money go further
One reason that spread betting has become popular is that it allows you to leverage a relatively small investment into a much larger profit potential. This is because you only need to deposit a small percentage of the total value of your bet when you make the spread bet. This means it’s a relatively inexpensive way to start trading. The other side of the coin is that if you lose the bet, you then owe the remainder of the total.
Stop loss allows you to limit your losses
A stop loss is a pre-set cap you can put on your bet so that it automatically stops if you reach a certain amount of money lost. With a spread bet, you’re not betting with defined odds as set by a traditional bookie, you’re betting a spread that has no defined stopping point. If you bet the market will rise, and it falls instead, your losses can continue for as long as the market falls. The stop loss essentially allows you to avoid losing more than your original bet, thus helping to limit your risk.
Spread betting isn’t stock ownership
Remember that with spread betting, you’re not purchasing stock—you don’t get any assets for the money you bet. You’re betting on what the stock will do, rather than purchasing it. You’re not limited to stock, of course—spread betting allows you to trade on currency and commodities too, from all over the world.
