What is spread betting all about?

Wouldn't it be great if you could make a short-term gain on shares quickly, cheaply and without worrying about paying tax? Well you can. It's called spread betting. Better still you can place up or down bets this way.

Here's how it works. When you buy shares you incur all kinds of costs. There's the broking fee, which could be say £10 (or more likely £9.99) to buy, and the same to sell. Then there's 0.5% stamp duty paid to the government. Next you'll suffer capital gains tax at up to 28% on any profit you make between buying and selling.

Alternatively, you could place a spread bet. The name derives from the fact that you suffer a bid-to-offer spread (the gap between the buying and selling price) but no other transaction fees or taxes.

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So, for example, if the BP spread at a firm such as igindex.com is 416-417, you could buy BP at £10 a point. This is negotiable (you could bet say £5 a point) however one point is fixed in this case it represents a 1p movement in the share price. If the BP share price rises, so will this spread.

Say it rises to 430-431. You could close out the bet by selling the spread at the new bid price of 430. Your profit is the gap between the opening offer price 417 and the closing bid price of 430. That's 13 points at £10 each so a £130 profit.

But there's another win here too. Buying BP shares would have required you to cough up the full price each say £4.17 per share. With a spread bet you only pay a deposit to your broker, which is a percentage of this, rather than the full amount. Sure, if your bet goes wrong and the BP price starts to fall, you can be required to top this up with more funds (as we'll discuss in a moment). But the "gearing" behind spread bets is another feature many punters like.

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On the flipside, it is very important to remember that you can easily and rapidly lose far more than your initial stake if you're not careful, so use "stop loss" orders to limit the damage. On an upbet, these close you out at a pre-agreed price below the level of your opening bet. This caps your losses should things go wrong.

You are not limited to upbets however. For example, in the above example you could have gone "short" at 416, for £10 a point. If the spread had fallen to 401-402 you could have bought it back at 402 and taken a profit of 14 points at £10 a point (a £140 profit).

Once you get the hang of shares, you could try your luck in any number of other markets ranging from forex to commodities. But you have to be careful do use the dummy account your broker should offer you before going "live" and only ever place small bets as a novice.

Opening an account is easy. You'll just usually need to supply bank or credit card details in addition to some personal information about yourself. See a comparison table of spread betting brokers here.