Spread betting: Five statements to make you flinch

By Deputy Editor Tim Bennett Aug 23, 2010

Tim Bennett

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At Moneyweek we are fans of spread betting. It's fast, cheap and gives you access to a wide range of markets. However it can also make you poor very quickly if you fall for too much sales patter. Here are five statements to be wary of.

1. Spread betting is low risk

It isn't. Spreads can move fast, especially when you bet on something volatile such as a currency or commodity. And on less liquid assets the related spread can be wide, meaning you need a decent movement in the underlying asset just to break even. On top of that, the losses on a down bet are theoretically unlimited as the price of, say, a share can rise indefinitely (even if it probably won't in practice). Sure, you can reduce your risk using stop loss orders, but be wary of anyone selling you spread betting as inherently low risk.

2. Spread betters pay less tax

Most do, some don't. Spread bets are blissfully free of stamp duty (paid up-front on shares) and capital gains tax. That's good news. However, you also cannot make use of any losses on a spread bet to reduce future capital gains as you would with, say, a share. So for a novice who loses money frequently, the tax benefits may turn out to be distinctly mixed.

3. Spread betting is commission-free

Partly true. You don't pay a commission per trade as you would buying shares. However, you do suffer the difference between a broker's bid and offer price – the spread. Always check how much this is before trading. Spread betting can be very cheap compared to conventional trading, but it isn't free.

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4. Spread betting is easy

It is. But making regular profits is not. Currency betters, for example, need to get familiar with their chosen exchange rate pair and get to know what moves the rate, how far and when. So a Jack-of-All-Trades approach is unwise. Placing a bet is straightforward, for sure – opening an online account won't baffle many punters. But don't be fooled into thinking that spread betting is an easy way to a cushy living.

5. Spread betting is basically like trading shares

There are some crucial differences. First off, you can only run losses in a spread betting account if you have sufficient funds – 'margin'. If your shares go down, on the other hand, you can opt to simply hold on and wait for them to rise. Shares often pay dividends, whereas spread bets don't. And with spread bets you get to 'gear up': by betting per point (say a 1p movement in the share price) you can make big profits, or losses. So make sure you understand the difference between that and just paying to buy shares before diving in.

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Published in Spread betting explained | More articles by Tim Bennett

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