Financial Spread betting is one of the fastest growing ways of speculating on the movement of an underlying share or index. For many investors it has become a flexible and cost efficient alternative to trading ordinary shares. This article aims to set out the benefits of spread betting above and beyond the advantages of investing in shares. Read on for more details.

What are the advantages of Spread Betting?
• Stamp Duty is not payable (saving 0.5% compared to a normal share purchase)
• Ability to ‘hedge’ existing positions
• All bets will normally be undertaken in sterling, thereby removing the exchange rate risk from bets on overseas stock.
• Profits on spread betting are not subject to capital gains tax*.
• Direct commissions and fees are not payable, the spread betting firm makes it’s money from the spread.
• Whereas with ordinary share dealing accounts you can not profit from a fall in share price (selling ‘short’)  with spread betting you can profit from falling or rising markets.
• Being leveraged products, they are traded on margin therefore bets can be placed with a relatively small initial outlay.
• A single account can give you Access to far greater range of financial markets.
• The ability to place very small bets, some companies let you place a trade of as low as 1p per point.
Tax Laws are subject to change.

Disadvantages
• Some markets may be very volatile and with leveraged products you could incur very large losses if your position moves against you.
• It may be less suited to the long term investor
• You have no investor rights, such as voting rights, dividends or corporate actions.

What can I trade?
Because you are not actually buying or selling the actual underlying instrument. the range of instruments that you 'bet' on can be far greater than simply underlying shares.

It is possible to bet on a number of underlying financial instruments:

Stock market indices such as the FTSE or NASDAQ.
Individual shares from the FTSE 100 and FTSE 250, but also from leading US and European shares.
Currencies, FX.
Commodities such as metals and oil.
Interest Rates both short term and long term.
Futures and options.
Bonds.

How does a Spread Bet work?
A spread bet is a bet on the future movement of an underlying instrument. In basic terms if you believe the underlying instrument is going to rise you place a buy bet, if you believe the underlying instrument is going to fall you place a sell bet. Unlike ordinary share trading you can befit from falling as well as rising shares or other financial instruments.

Cost and Margin Requirements
How much does a spread bet cost?
When placing a spread bet the only costs involved are included within the spread, so effectively the wider the spread the more expensive it is to trade.

How much money do I need to place a bet or trade?
Spread betting is traded on margin, which means that you simply need to place a deposit when you open a trade of only a % of the positions total value.

Margin Call
If a position moves against you, you may have to pay additional money over the initial deposit this is know as margin or margin call and will be made by the spread betting company if your open positions are running at a loss over and above the . It is therefore advisable that you do not open positions that require all your available funds as an initial deposit or you may be forced to close your position if you can not pay the required margin.

Stop and Limit Orders
It is possible to set certain levels that if reached will automatically open or close a position.

Limit Order
A Limit order is one that is executed at a better price than the prevailing price, ie for a buy bet when the stock drops to a certain level or for a sell bet when the stock rises to a certain level.

Stop orders
A stop order is one that is executed at a worse price than the prevailing market price one of the most common uses of this is a stop loss order. It is possible to make substantial profits when placing spread bets as well as substantial losses which is why many spread betting firms allow you to place a stop loss when you open a trade.

A stop loss is a price level set by the client on a particular trade that if reached automatically closes out the particular position at the desired price.

This article was written by SS Smith  04 August 09