Spread betting is a betting on the direction of the underlying asset. For example say you want to bet on APPLE stocks price direction.
Example of a trade:
By direction we mean that you bet on the future rise or fall of APPLE.
So if you believe that APPLE stock will go up in price, you can place a speculative bet on the spread betting platform for beginners and buy from the broker at a given BID price.
Let’s assume you buy 10 Apple (AAPL) shares at £100 per share , then the price goes up to £120 per share.
Spread Betting and Taxes
If you are a UK resident, then in most cases spread betting is tax efficient. You pay no capital gains tax on the gains!
Pros of spread betting
- tax efficiency in the UK
- leverage allows you to start with small amount of money
- no need to own underlying asset
- risk management strategies
Cons of spread betting
- more than 70% of traders loose money
- leverage trading carries high risk for your capital
What is spread
Each spread betting platform gives you two prices for each asset.
There is ASK price that determines price at which you can sell the asset and BID price at which you can sell .
The difference between ASK and BID is the spread.
Remember that spread betting broker makes money on the spread.
Leverage is pretty common in derivate trading a lot. Whether it is CFD or spread betting, leverage gives you higher buying power. You have much larger exposure, meaning you can open larger trades, and therefore a smaller market move can result in significant profit or loss.
Leverage is closely related to margin trading.
Margin is your own money that you need to have in your trading account prior to opening a trade. Lets call it a downpayment.
With 1:30 leverage your capital of 1£ will have buying power of £30.
Spread betting vs CFDs
Spread betting is very similar to a globally popular derivative trading that is called CFD (contracts for difference) trading.
In principle, both forms of trading are very similar, as derivatives on underlying assets are traded in both cases . They also have in common the leverage. However, in the end there are also differences that you as a trader should be aware of. The biggest difference is probably in the geographical popularity. Spread betting is much more widespread in the UK, while CFDs have gained popularity in continental Europe and Asia during the early 2010’s.