Spread Betting – The Good, the Bad and the Ugly

Since being developed in the 1970s, financial spread betting has gone from a small niche product to become one of the most popular financial instruments and derivatives used by private traders of all persuasions.

Quick introduction to spread betting

Explained simply, the concept of spread betting on financial instruments such as stocks and shares, commodities, bonds and currencies is similar to other common derivatives like stock options and futures. Indeed, just like those derivatives, a spread bet tracks a specific financial instrument and the value of the spread bet is directly based on the price and value of the underlying financial instrument on which the bet is based. Consequently, the spread bet trader does not actually buy the underlying stocks or currencies or commodity, instead, he or she simply speculates – or ‘bets’ – on the future price of the underlying financial instrument on which the bet is based.

First the good

One of the most frustrating aspects of trading in conventional stocks and shares is that any gain is subject to a variety of taxes including upfront taxes such as stamp duty tax in the UK and also post-transaction taxes such as capital gains. The good news is that spread trading is free from capital gains tax. This is true at least for spread betting UK stocks. Freedom from capital gains taxes and stamp duty can add up into significant extra profit totaling anywhere between 20 per cent and 40 per cent of the overall value of the transaction. It goes without saying that this is not trivial.

Next, the bad

The ‘bad’ here is that although you do not pay taxes on gains made via spread betting, you still incur other costs. The biggest of these is the bid-ask spread which can sometimes be large, depending depending on the spread betting firm that you use.

Now for the plain ugly!

Unfortunately, the attractive features of financial spread betting have made it an instrument of choice for day traders with a get-rich-quick mentality. If you ask the question: is it possible to day trade for a living? Of course, most people out there who have something to sell to you will point to the instances where a small number of highly skilled professionals have been able to make a tremendous amount of money from the financial markets. However, the huge risks involved make day trading unsuitable for most people.