Advantages and Disadvantages of Spread Betting

If you are looking forward to take a flexible stand in the stock market, spread betting could be of great help to you. Through a spread bet, you can wager on the outcome of an event, such as expecting Vodafone’s share prices to rise. If your intuition turns out to be true, you land up winning or vice versa. It is through a spread betting company that you can place a spread bet. The company quotes two prices, out of which one is the bid or sell price and the other is the offer or buy price. You sell if you think the price of a market will fall and you buy if you think the price of the market will rise.

Spread betting is one of the best means with which you can get an opportunity to speculate the future movement of an index or share without possessing it. With spread betting, investors get an opportunity to deal in ordinary shares without actually owning them. The practice has been very common in the UK stock market since a long time and there are more than 20 spread betting companies in the UK. One can trade in the following things:

- Currency trading
- Indices of stock markets like the NASDAQ and FTSE.
- Individual shares.
- Short as well as long term rate of interest.

Example of a spread bet:

Let’s say the bid quote decided by a spread betting company is $100 and the offer price is $105 for the stock of XYZ Company. If you believe that the price of the stock will fall below $100, you decide to stake an amount of $3 for every dollar that the stock falls below $100, meaning that for each dollar it falls, the trade makes a profit of $3. Alternatively, for each dollar the price rises above $100, the position nets a loss of $3. Later, if the stock price falls to $90, you bag yourself a $30 profit ($100-$90 x $3).

Like every coin has two sides, spread betting too has some advantages and disadvantages.

Advantages of Spread betting:

- Tax free profit*
- Stamp duty is not to be paid.
- Profit can be derived from rising or falling markets.
- No commission to pay to the company.
- With ‘stop loss’ you can limit your risk.

Disadvantages of spread betting:

- You can incur a lot of loss, especially if the company doesn’t have a feature of ‘stop loss’.
- It won’t suit a long term investor.
- No voting rights or dividends on share trades as you don’t own the stock.

Despite the disadvantages, the practice of spread betting is increasing every passing day in stock markets and other fields as well.

From Editor: This is a guest article from a third party on Spread Betting. Spread Betting is a leveraged product which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

Disclaimer: profits made in spread betting are currently free from UK Capital Gains Tax. Please be aware that UK tax laws are subject to change. Seek your own tax advice.



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