Three spread betting myths

published 16 July 2010

Spread betting is a threat to traditional share dealing a spread bet can be a faster, cheaper and tax-free way of making money. So it attracts its fair share of critics. Here are three myths about spread betting and why you should take them with a pinch of salt.

'Going short' is nasty

Regulators have imposed various bans on professional 'short sellers' as the financial crisis has unfolded. By association some investors think a spread better's ability to go short is somehow morally wrong. This is nonsense. Short selling is risky (your losses if the underlying asset rises are potentially unlimited) and only possible if and when a share has been over-hyped. So if anything, short sellers should be lauded for knocking the froth off toppy shares before other investors pile in and get burned. And don't forget: just like a spread better, the investors making money from rising share prices are not raising so much as a penny for the underlying company they are merely trading second-hand shares bought from other investors.

Spread betters always lose

Sure, when you place a spread bet, you are betting against a broker insofar as you accept their "spread". And to be blunt, most spread betters do end up losing their money to the house. But it's not impossible to make money as long as you have a consistent, well-disciplined strategy and a cool head. Practice makes perfect so make use of any trading simulations offered by your spread betting broker.

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Spread betting can only be used for gambling

Yes, spread betting can be used to gamble. And gambling is risky which is why we recommend you use stop losses. But you can also use spread bets to hedge a portfolio short term and actually reduce risk (see last week's edition of MoneyWeek for more on this).

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.