For a beginner, one of the obvious questions to ask about spread betting is: why bother? After all, you can place an up bet on, say, Tesco, simply by buying Tesco shares. Why learn how to use a different product to achieve the same end? Here are three reasons why:
Leverage
With spread betting you only have to commit a small proportion of the value of the trade (typically 5-20%), not the full amount (100%) as you do when you trade shares. This magnifies gains although on the flipside, you can also lose a lot more.
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Tax
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Spread betting is tax free. Shares, on the other hand, attract both stamp duty when you buy (0.5% of the purchase price) and capital gains tax on any profits you make (at up to 28%).
Shorting
Short-selling shares in order to bet on prices falling is very difficult for a UK private investor. However, placing a downbet using a spread bet is as easy and quick as being 'long'.
The downsides of spread betting
However, it is not true to say that spread betting is therefore a no brainer and you should abandon conventional trading. Here are three drawbacks to consider.
No dividends
If income is your goal, spread betting will not help you as you do not receive dividends as you would from holding shares that offer a decent yield.
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Losses require cash
If shares go down in value, you can simply wait for them to recover. Not so with spread bets to run a losing position you have to be prepared to fund it by paying additional variation margin to your broker.
Spreads
Brokers make their money from the gap between the buying and selling price on every bet. For very long bets this can be sizeable, and you may be better off paying the broker's fixed dealing charge for a share in pure transaction cost terms.
