The appeal of spread betting

The economy might still be trying to pull out of recession. Yet spread-betting brokers seem to be having a ball. Adverts are commonplace now in magazines and newspapers. Meanwhile, City Index sees between 350,000 and 400,000 trades a month just on its mobile-phone platform an increase of 50% in the past year. So, for a novice, what's the appeal?

Spread betting is high risk compared to share trading. And, perhaps more than any other area of financial markets, some homework is essential before you dive in. However, with the right safety measures in place, you can add a whole new dimension to your investing and have some fun along the way. Here are four advantages to spread betting.

Leverage

Also known as 'gearing' this is the ability to make a large return from a small outlay. A £1,000 investment in, say, Tesco shares, gives you £1,000 of exposure to Tesco. However, £1,000 paid to a spread-betting broker to open a Tesco spread bet gets you far more than £1,000 of exposure. The important point is that, with a spread bet, you can make profits far faster than with a direct investment in shares. On the flip side, you can also lose money faster too.

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Tax-free investing

Someone buying shares faces a lot of potential taxes. There's stamp duty paid up front at 0.5% of the purchase price; then, for any shares held outside an Isa, there's capital gains tax on any profit made before sale; finally, if you receive a dividend you'll pay income tax on it. But a spread better can avoid tax. Gains are all made tax-free whether you are betting on shares, currencies or commodities. There's a flipside to this no tax loss relief if you place duff trades. But for most traders, that's a price worth paying. Our article on contracts for difference reveals an alternative to spread betting where your loss relief is protected.

Speed and flexibility

As a share trader you may find your internet trading service only gives you access to certain shares or markets. Most spread-betting brokers, on the other hand, offer fast access via one internet account to a huge range of markets shares, currencies, commodities, not to mention sports and even political bets (did you know you can bet on the length of the budget speech, for example?).

What's more, many providers will offer this access a number of ways via your mobile phone, for example. And with a huge number of brokers to choose from, charges for trading (brokers keep the spread between the bid and offer price,) are getting more and more competitive. So much so that some brokers even offer zero spreads as an opening incentive.

The ability to go short

In volatile markets, traders want to be able to make money from rising and falling prices. This is nigh on impossible when you trade shares. It is straightforward (albeit potentially risky) with a spread bet. That explains some of the recent popularity of spread betting in volatile times.

Good luck!